Does Economic Freedom Improve Macroeconomic Performance? A New Research with the PVAR Method in the G-7 Group

Year 2021, Volume: 18 Issue: 1, 9 - 20, 30.06.2021

Baki Özsolak , Hakan Kum

Abstract

The relationship between economic freedom (EF) and growth (GDP) has been the subject of a lot of research recently. The aim of this study is to examine the relationship between EF and GDP in G-7 countries. In the study, 1996-2019 observation period and panel vector autoregression (PVAR) analysis were used as econometric method. In the study, EF variable is included in the equation as subcomponents. A positive relationship was determined between GDP and public expenditures and government integrity variables, which are subcomponents of EF. However, there is a negative relationship between the other three variables and GDP. According to causality analyses, there is an absolute relationship between GDP and EF. In this study, the relationship between EF and macro performance was analyzed again using the most up-to-date and reliable data. Contrary to the general literature, the results show a negative relationship between EF and growth. In addition, many studies in the literature as an econometric method only make causality or coefficient estimation. However, in this study, the PVAR analysis method, in which both causality and regression estimates are presented together, was used. These three cases show the main original contributions of the study to the literature.

Keywords

Economic Freedom, Macroeconomic Performance, GDP, PVAR, Casuality

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