Institutions and policies of economic freedom: different effects on income and growth

The aim of this paper is to provide some additional results concerning how economic freedom enhances growth and/or long-run income. Our hypothesis is that institutions and policies of economic freedom may have different effects on long-run income and growth, both in terms of their size and working mechanisms. To test our hypothesis, we apply both Acemoglu et al.’s (Am Econ Rev 91(5):1369–401, 2001) and Mankiw et al.’s (Q J Econ 107(2):407–437, 1992) modeling strategies in our cross-country regression analyses. The major finding is that the institutions of economic freedom are of primary importance in economic development: they matter both in the long run and during the catching up period, and have both direct and indirect effects. On the other hand, the effects of economic freedom policies (monetary and fiscal) matter only during the catching up period, with the fiscal policy having a more straightforward effect. Furthermore, the estimates from the two modeling strategies are in line with each other, which can be seen as a further corroboration of our results.