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Growth-enhancing economic freedom

Growth-enhancing economic freedom PurposeWe explore how economic freedom measurements can be used to guide policy.Design/methodology/approachWe propose a method for creating a growth-enhancing economic freedom index, which allows for nonlinearities and interaction effects between the components to economic freedom. We use this method to illustrate that US states differ in which policy area generates the greatest gains.FindingsTo validate the method presented, we apply our index to state bond markets. Financial market participants have the incentive to properly evaluate states’ policies. If our measurement is useful, then it should correlate with bond ratings. Consistent with this hypothesis, we present evidence that state bond ratings are strongly correlated with our growth-enhancing economic freedom index.Originality/valueIt has been well-established that economic freedom is associated with good economic outcomes. Economic freedom is comprised of numerous dimensions. Thus, the marginal benefit of improving policy in one area can be expected to depend on the amount of freedom in the other dimensions. Which policy improvement is most impactful depends on the entire menu of current policies and, therefore, differs between states. Our new method can then be used as a guide to determining for a particular state which policies can be expected to impact economic well-being the most. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

Growth-enhancing economic freedom

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1757-6385
DOI
10.1108/JFEP-11-2016-0086
Publisher site
See Article on Publisher Site

Abstract

PurposeWe explore how economic freedom measurements can be used to guide policy.Design/methodology/approachWe propose a method for creating a growth-enhancing economic freedom index, which allows for nonlinearities and interaction effects between the components to economic freedom. We use this method to illustrate that US states differ in which policy area generates the greatest gains.FindingsTo validate the method presented, we apply our index to state bond markets. Financial market participants have the incentive to properly evaluate states’ policies. If our measurement is useful, then it should correlate with bond ratings. Consistent with this hypothesis, we present evidence that state bond ratings are strongly correlated with our growth-enhancing economic freedom index.Originality/valueIt has been well-established that economic freedom is associated with good economic outcomes. Economic freedom is comprised of numerous dimensions. Thus, the marginal benefit of improving policy in one area can be expected to depend on the amount of freedom in the other dimensions. Which policy improvement is most impactful depends on the entire menu of current policies and, therefore, differs between states. Our new method can then be used as a guide to determining for a particular state which policies can be expected to impact economic well-being the most.

Journal

Journal of Financial Economic Policy – Emerald Publishing

Published: May 2, 2017

References

  • Economic freedom and income inequality revisited: evidence from a panel error correction model
  • Economic freedom and migration flows between US states
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  • Economic freedom and state bond ratings
  • Foreign direct investment, economic freedom, and growth: new evidence from Latin America
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  • Public policy, entrepreneurship, and venture capital in the united states
  • Economic freedom and public, non-market institutions: evidence from criminal prosecution