We bridge two areas of study by applying panel vector autoregression (PVAR) to human capital, political institutions, economic institutions, and economic output per capita. Institutions and human capital have competed within the scholarly literature as hypotheses explaining the origins of economic growth. Elsewhere, our measure of economic institutions, the Economic Freedom of the World index, has recently been explored extensively as a dependent variable, whereas previously it had been used as an explanatory variable. We wish to measure the interrelationships between political and economic institutions, as well as their interrelationships with economic output and human capital, in contrast to the literature which emphasizes the importance of political institutions alone. We explore these interrelationships in a PVAR model, finding that, descriptively at least, higher-quality economic institutions are associated with more output. We also find weak evidence that higher-quality political institutions are associated with less output and less education. We also find a robust positive effect of education on the quality of economic institutions. In performing this analysis, we contribute to the literature on the institutions and human capital debate, as well as to the literature on the causes of free economic institutions.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
The Penn World Table only currently runs through 2014. For the last period in our data, 2015, we use the data from 2014 as a substitute.
At least five time observations are required to be included in the “full sample.”
Regression results are meaningless if the variables are of a different order of integration (Enders 2010: 199).
Results from the Pesaran (2007) panel unit root test, which is robust to the presence of cross-sectional dependence, suggests that all four series contain a unit root.
Harris and Tzavalis (1999) show that the assumption that T is asymptotic yields a test with reduced power short panels.
Results available upon request.
Prior to performing the Helmert transformation, each series is differenced to achieve stationarity. See Sect. 3 for the corresponding discussion and unit root tests.
We avoid alternative estimators, such as system GMM, that take advantage of additional moment conditions but require stronger assumptions, specifically assumptions about initial conditions (Bun and Sarahdis 2015: 85).
See Sect. 3 for more on the non-stationarity of the series.
Blundell and Bond (1998) suggest the system GMM estimator, which takes advantage of additional moment conditions by making assumptions about the initial conditions.
All series in the present study are differenced to ensure stationarity. After differencing, the estimated eigenvalues for each series are less than 0.5 in absolute value and therefore lie well within the unit circle.
In fact, increases in the cross-sectional dimension may reduce bias in GMM estimation of a PVAR system as in Binder et al. (2005).
90% confidence is actually a higher standard than is often used in much of the other literature employing vector autoregression. See Murphy (2015).
Impulse response functions available upon request.
Abrigo MRM, Love I (2016) Estimation of panel vector autoregression in Stata. Stata J 16:778–804
Acemoglu D, Johnson S (2005) Unbundling institutions. J Pol Econ 115:949–995. https://doi.org/10.1086/432166
Acemoglu D, Robinson J (2012) Why nations fail: the origins of power, prosperity, and poverty. Crown Business, New York
Acemoglu D, Johnson S, Robinson J (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91:1369–1401. https://doi.org/10.1257/aer.91.5.1369
Acemoglu D, Gallego F, Robinson J (2014a) Institutions, human capital, and development. Annu Rev Econ 6:875–912. https://doi.org/10.1146/annurev-economics-080213-041119
Acemoglu D, Naidu S, Restrepo P, Robinson J (2014b) Democracy does cause growth. NBER working paper 20004
Alonso JA, Garcimartin C (2013) The determinants of institutional quality: more on the debate. J Int Dev 25:206–226. https://doi.org/10.1002/jid.1710
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297. https://doi.org/10.2307/2297968
Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econom 68:29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Aspergis N, Cooray A (2017) Economic freedom and income inequality: evidence from a panel of global economies—a linear and a non-linear long-run analysis. Manchester School 85:88–105. https://doi.org/10.1111/manc.12137
Atems B, Jones J (2015) Income inequality and economic growth: a panel VAR approach. Empir Econ 48:1541–1561. https://doi.org/10.1007/s00181-014-0841-7
Barro R (1991) Economic growth in a cross section of countries. Q J Econ 106:407–443. https://doi.org/10.2307/2937943
Binder M, Hsiao C, Pesaran MH (2005) Estimation and inference in short panel vector autoregressions with unit roots and cointegration. Econom Theory 21:795–837. https://doi.org/10.1017/S0266466605050413
Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Bun JGM, Sarahdis V (2015) Dynamic panel data models. In: Baltagi B (ed) The Oxford handbook of panel data. Oxford University Press, New York, pp 76–110
Caplan B (2001) What makes people think like economists? Evidence on economic cognition from the ‘Survey of Americans and Economists on the Economy’. J Law Econ 44:395–426. https://doi.org/10.1086/322812
Caplan B, Miller SC (2010) Intelligence makes people think like economists: evidence from the General Social Survey. Intelligence 38:636–647. https://doi.org/10.1016/j.intell.2010.09.005
Choi I (2015) Almost all about unit roots: foundations, developments, and applications, 1st edn. Cambridge University Press, New York
Clark JR, Lawson R, Nowrasteh A, Powell B, Murphy RH (2015) Does immigration impact institutions? Public Choice 163:321–335. https://doi.org/10.1007/s11127-015-0254-y
Cohen D, Soto M (2007) Growth and human capital: good data, good results. J Econ Growth 12:51–76. https://doi.org/10.1007/s10887-007-9011-5
Dawson JW (2003) Causality in the freedom-growth relationship. Euro J Pol Econ 19:479–495. https://doi.org/10.1016/S0176-2680(03)00009-0
De Haan J, Lundstrom S, Sturm J-E (2006) Market-oriented institutions and economic growth: a critical survey. J Econ Surv 20:157–191. https://doi.org/10.1111/j.0950-0804.2006.00278.x
De Hoya R, Sarafidis V (2006) Testing for cross-sectional dependence in panel-data models. Stata J 6:482–496
Dias J, Tebaldi E (2012) Institutions, human capital, and growth: the institutional mechanism. Struct Change Econ Dyn 23:300–312. https://doi.org/10.1016/j.strueco.2012.04.003
Easterly W (2014) The tyranny of experts: economists, dictators, and the forgotten rights of the poor. Basic Books, New York
Enders W (2010) Applied econometric time series, 3rd edn. Wiley, Hoboken
Fabro G, Aixala J (2012) Direct and indirect effects of economic and political freedom on economic growth. J Econ Iss 46:1059–1080. https://doi.org/10.2753/JEI0021-3624460411
Farr WK, Lord RA, Wolfenbarger JL (1998) Economic freedom, political freedom, and economic well-being: a causality analysis. Cato J 18:247–262
Feenstra RC, Inklaar R, Timmer MP (2015) The next generation of the Penn World Table. Am Econ Rev 105:3150–3182. https://doi.org/10.1257/aer.20130954
Flachaire E, García-Peñalosa C, Konte M (2014) Political versus economic Institutions in the growth process. J Comp Econ 42:212–229. https://doi.org/10.1016/j.jce.2013.05.001
Giuliano P, Mishra P, Spilimbergo A (2013) Democracy and reforms: evidence from a new dataset. Am Econ J: Macroecon 5:179–204. https://doi.org/10.1257/mac.5.4.179
Glaeser E, La Porta R, Lopez-de-Silanes F, Shleifer A (2004) Do institutions cause growth? J Econ Growth 9:271–303. https://doi.org/10.1023/B:JOEG.0000038933.16398.ed
Góes C (2016) Institutions and growth: a GMM/IV panel approach. Econ Lett 138:85–91. https://doi.org/10.1016/j.econlet.2015.11.024
Gwartney J, Lawson R, Hall JC (2017) Economic freedom of the world annual report. Fraser Institute, Vancouver
Hall JC (2016) Institutional convergence: exit or voice? J Econ Fin 40:829–840. https://doi.org/10.1007/s12197-015-9345-3
Hall JC, Lawson R (2014) Economic freedom of the world: an accounting of the literature. Contemp Econ Pol 32:1–19. https://doi.org/10.1111/coep.12010
Hall JC, Sobel R, Crowley G (2010) Institutions, capital, and growth. South Econ J 77:385–405. https://doi.org/10.4284/sej.2010.77.2.385
Harris RDF, Tzavalis E (1999) Inference for unit roots in dynamic panels where the time dimension is fixed. J Econometrics 91:201–226. https://doi.org/10.1016/S0304-4076(98)00076-1
Hausmann R, Pritchett L, Rodrik D (2005) Growth Accelerations. J Econ Growth 10:303–329. https://doi.org/10.1007/s10887-005-4712-0
Hayakawa K (2009) First difference or forward orthogonal deviation—which transformation should be used in dynamic panel data models? A simulation study. Econ Bull 29:2008–2017
Hayakawa K (2016) Improved GMM estimation of panel VAR models. Comput Stat Data Anal 100:240–264. https://doi.org/10.1016/j.csda.2015.05.004
Hayakawa K, Nagata S (2016) On the behaviour of the GMM estimator in persistent dynamic panel data models with unrestricted initial conditions. Comput Stat Data Anal 100:265–303. https://doi.org/10.1016/j.csda.2015.03.007
Hlouskova J, Wagner M (2006) The performance of panel unit root and stationarity tests: results from a large scale simulation study. Econom Rev 25:85–116. https://doi.org/10.1080/07474930500545504
Holtz-Eakin D, Newey W, Rosen HS (1988) Estimating vector autoregressions with panel data. Econometrica 56:1371–1395
Hsiao C (2007) Panel data analysis—advantages and challenges. TEST 16:1–22. https://doi.org/10.1007/s11749-007-0046-x
Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econom 115:53–74. https://doi.org/10.1016/S0304-4076(03)00092-7
Jong-A-Pin R, De Haan J (2011) Political regime change, economic liberalization, and growth accelerations. Public Choice 146:93–115. https://doi.org/10.1007/s11127-009-9585-x
Knack S, Keefer P (1995) Institutions and economic performance: cross-country tests using alternative institutional measures. Econ Polit 7:207–227. https://doi.org/10.1111/j.1468-0343.1995.tb00111.x
Kollias C, Paleologou S-M. Military spending, economic growth and investment: a disaggregated analysis by income group. Empir Econ. https://doi.org/10.1007/s00181-017-1379-2
Koutsomanoli-Filippaki A, Mamatzakis E (2009) Performance and Merton-type default risk of listed banks in the EU: a panel VAR approach. J Bank Fin 33:2050–2061. https://doi.org/10.1016/j.jbankfin.2009.05.009
Krieger T, Meierrieks D (2016) Political capitalism: the interaction between income inequality, economic freedom, and democracy. Euro J Pol Econ 45:115–132. https://doi.org/10.1016/j.ejpoleco.2016.10.005
Levin A, Lin C-F, Chu C-SJ (2002) Unit root tests in panel data: asymptotic and finite-sample properties. J Econometrics 108:1–24. https://doi.org/10.1016/S0304-4076(01)00098-7
Love I, Zicchino L (2006) Financial development and dynamic investment behavior: evidence from panel VAR. Q Rev Econ Fin 46:190–210. https://doi.org/10.1016/j.qref.2005.11.007
Mankiw NG, Romer D, Weil DN (1992) A contribution to the empirics of economic growth. Q J Econ 107:407–437. https://doi.org/10.2307/2118477
March RJ, Lyford C, Powell B (2017) Causes and barriers to increases in economic freedom. Int Rev Econ 64:87–103. https://doi.org/10.1007/s12232-016-0263-2
Marshall M, Gurr TR, Jaggers K (2017) Polity IV project: political regime characteristics and transitions, 1800–2012. Center for Systemic Peace, Vienna
Meyer JW, Boli J, Thomas GM, Ramirez FO (1997) World society and the nation state. Am J Soc 103:144–181. https://doi.org/10.1086/231174
Minier JA (1998) Democracy and growth: alternative approaches. J Econ Growth 3:241–266. https://doi.org/10.1023/A:1009714821770
Murphy RH (2015) Unconventional confidence bands in the literature on the government spending multiplier. Econ J Watch 12:72–83
Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49:1417–1426
Nijman T, Verbeek M (1990) Estimation of time-dependent parameters in linear models using cross-sections, panels, or both. J Econom 46:333–346. https://doi.org/10.1016/0304-4076(90)90013-J
North D (1990) Institutions, institutional change, and economic performance. Cambridge University Press, Cambridge
O’Reilly C, Murphy RH (2017) Do institutions mitigate the risk of natural resource conflicts? Contemp Econ Pol 35:532–541. https://doi.org/10.1111/coep.12207
O’Reilly C, Powell B (2015) War and the growth of government. Eur J Pol Econ 40:31–41. https://doi.org/10.1016/j.ejpoleco.2015.10.001
Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. CESifo working paper 1229
Pesaran MH (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Econom 22:265–312. https://doi.org/10.1002/jae.951
Petrarca I, Ricciuti R (2015) Synthetic ‘real socialism’: a counterfactual analysis of political and economic liberalizations. Econ Bus Rev 1:69–88. https://doi.org/10.18559/ebr.2015.1.6
Pritchett L (2001) Where has all the education gone? World Bank Econ Rev 15:367–391
Rode M, Gwartney J (2012) Does democratization facilitate economic liberalization? Euro J Pol Econ 28:607–619. https://doi.org/10.1016/j.ejpoleco.2012.07.001
Sen A (1981) Poverty and famines: an essay on entitlement and deprivation. Oxford University Press, Oxford
Sen K (2013) The political dynamics of economic growth. World Dev 47:71–86. https://doi.org/10.1016/j.worlddev.2013.02.015
Sims CA (1980) Macroeconomics and reality. Econometrica 48:1–48
Sobel R, Coyne C (2011) Cointegrating institutions: the time-series properties of country institutional measures. J Law Econ 54:111–134. https://doi.org/10.1086/652304
Vreeland JR (2008) The effects of political regime on civil war: unpacking anocracy. J Conflict Resolut 52:401–425. https://doi.org/10.1177/0022002708315594
Williamson OE (2000) The new institutional economics: taking stock, looking ahead. J Econ Lit 38:595–613. https://doi.org/10.1257/jel.38.3.595
Williamson C (2009) Informal institutions rule: institutional arrangements and economic performance. Public Choice 139:371–387. https://doi.org/10.1007/s11127-009-9399-x
The authors would like to thank Vasudeva Murthy for his helpful comments and suggestions.
About this article
Cite this article
Murphy, R.H., O’Reilly, C. Applying panel vector autoregression to institutions, human capital, and output. Empir Econ 57, 1633–1652 (2019). https://doi.org/10.1007/s00181-018-1562-0
- Economic growth
- Political institutions
- Economic institutions
- Human capital