This paper outlines the alternative channels through which institutions affect growth, and studies the empirical relationship between institutions, investment, and growth. The empirical results indicate that (i) free-market institutions have a positive effect on growth; (ii) economic freedom affects growth through both a direct eSfect on total factor productiviv and an indirect effect on investment; (iii) political and civil liberties may stimulate investment; (iv) an important interaction exists between freedom and human capital investment; (v) Milton Friedman 5 conjectures on the relation between political and economic freedom are correct; (vi) promoting economic freedom is an effective policy toward facilitating growth and other types offreedom. (JEL 017, 040, P51)

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We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it-total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation and marginal tax rates offer a straightforward explanation for the productivity slowdown of the 1970s.

Data quality in the Penn World Tables varies systematically across countries that have different growth rates and are at different stages of economic development, thus introducing measurement error correlated with variables of economic interest. We explore this problem with three examples from the literature, showing that the problem appears to be minor in growth convergence regressions but serious in estimating the effect of income volatility on growth and in a cross-country test of the Permanent Income Hypothesis. The results suggest, at the least, a need for performing appropriate sensitivity tests before drawing conclusions from analyses based on these data. JEL Classification: E21, O47Information économique versus variation de qualité dans les données transversales pour plusieurs pays. La qualité des données dans les Penn World Tables varie systématiquement d'un pays à l'autre selon les taux de croissance et les stages de développement. Cela injecte des erreurs de mesure qui sont reliées aux variables économiques. Les auteurs examinent ce genre de problème à l'aide de trois exemples tirés de la littérature spécialisée. Ces exemples montrent que le problème semble mineur dans les études de convergence de la croissance, mais qu'ils paraîssent sérieux quand on calibre l'effet de la volatilité du revenu sur la croissance et dans les tests transversaux pour plusieurs pays de l'hypothèse du revenu permanent. Les resultats de ces analyses montrent qu'il faut faire les tests de sensitivité appropriés avant de tirer des conclusions à partir des analyses utilisant ces données.

C32, O40, Growth, Convergence, Convergence clubs, Unit-root tests, Structural breaks,