Scholarly Comments on Academic Economics

Handling Economic Freedom in Growth Regressions: A Reply to Cole and Lawson

by ,

*Jakob de Haan* is Professor of Political Economy, University of Groningen, the Netherlands. He is also director of SOM, the research institute and graduate school of the faculties of Management and Organisation and Economics of the University of Groninge
*Jan-Egbert Sturm* is Professor of Applied Macroeconomics and director of KOF—Swiss Institute for Business Cycle Research both at the ETH Zurich, Switzerland (Link). He is also a member of the European Economic Advisory Group at CESifo, Munich (Link). His

Abstract

COLE AND LAWSON (2007) STATE THAT “EQUATION (1) IS Lawson’s preferred specification, while de Haan et al. favor Equation (4).” That is not an appropriate summary of our position, however. We do not have a preference for Equation (4). In our papers on the relationship between economic freedom and economic performance we have always estimated Equations (3) and (4), using the Extreme Bounds Analysis to test whether (the level or the change in) the Fraser index is robustly related to economic growth. Our results are that the level of economic freedom is not robustly related to growth, in contrast to the change of the economic freedom. In our reply (De Haan and Sturm 2006) to Lawson (2006), we explain that the main reason that we do not consider Equation (1) a proper specification is that Equation (1) is equivalent to Equation (2). All sides in the debate seem to agree that Equation (2) is definitely not a good model as there is a serious problem of endogeneity of one of the right-hand side variables (i.e. EF1).