Working Paper No. 1056

Economic Freedom and Economic Crisis

Published: January 23, 2015Pages: 31Keywords: Crisis; Economic freedom; InstitutionsJEL-codes: O11; O43; P16
Published version

Economic Freedom and Economic Crisis Christian Bjørnskov


In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crisis. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993-2010.

I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.

Christian Bjørnskov

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chbj@econ.au.dk

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