An Anchor in Stormy Seas: Does Reforming Economic Institutions Reduce Uncertainty? Evidence from New Zealand

This paper begins with a brief narrative on the close conceptual relationship between institutions and uncertainty, which motivates using uncertainty as a metric of institutional reform success in the subsequent econometric analysis. Our analysis, based on using uncertainty measures constructed on firm-level data in a Bayesian Structural AutoRegression model, suggests that while during the reform period uncertainty increased, New Zealand's wide-ranging institutional reform in the late 20th century (approximately 1984 to 1995) was eventually successful in lowering uncertainty from domestic institutional sources. We also contend that rising uncertainty immediately prior to reform could have been the spur to reform. Given New Zealand was one of many OECD countries that pursued market-oriented economic institutional reform over the period, our results have insights beyond just understanding the New Zealand experience.