Time stability of the impact of institutions on economic growth and real convergence of the EU countries: implications from the hidden Markov models analysis

Abstract

Research background: It is not straightforward to identify the role of institutions for the economic growth. The possible unknown or uncertain areas refer to nonlinearities, time stability, transmission channels, and institutional complementarities. The research problem tackled in this paper is the analysis of the time stability of the relationship between institutions and economic growth and real economic convergence.
 Purpose of the article: The article aims to verify whether the impact of the institutional environment on GDP dynamics was stable over time or diffed in various subperiods. The analysis covers the EU28 countries and the 1995?2019 period.
 Methods: We use regression equations with time dummies and interactions to assess the stability of the impact of institutions on economic growth. The analysis is based on the partially overlapping observations. The models are estimated with the use of Blundell and Bond?s GMM system estimator. The results are then averaged with the Bayesian Model Averaging (BMA) approach. Structural breaks are identified on the basis of the Hidden Markov Models (HMM).
 Findings & value added: The value added of the study is threefold. First, we use the HMM approach to find structural breaks. Second, the BMA method is applied to assess the robustness of the outcomes. Third, we show the potential of HMM in foresighting. The results of regression estimates indicate that good institution reflected in the greater scope of economic freedom and better governance lead to the higher economic growth of the EU countries. However, the impact of institutions on economic growth was not stable over time.

Public investment multipliers by functions of government: An empirical analysis for European countries

“…These results seem to suggest that investments are particularly effective in fostering economic growth when they support the creation of human capital and the functioning of economic affairs and general public services, which also include basic R&D and the operability of public institutions. While the role of human capital, institutions and R&D in sustaining economic growth is indeed well documented (for a review of relevant literature, see respectively Ogbeifun and Shobande, 2021;Bernardelli et al, 2021;Deleidi and Mazzucato, 2021), economic affairs are directly related to total factor productivity, which is an essential component of economic growth (Carbonari et al, 2013 showed the permanent impact on GDP of an increase in public sector's productivity).…”

Sustainable growth rate, corporate value of US firms within capital and labor market distortions: The moderating effect of institutional quality

“…Institutional quality is our moderating variable. Institutional quality is multifaceted and challenging to define (Bernardelli et al, 2021;Diaz Tautiva et al, 2023;Němečková & Hayat, 2022). Some studies used the Institutional quality index based on five indicators from the International Country Risk Guide's Political Risk Service.…”

Human capital convergence in European NUTS 2 regions

“…A majority of studies into regional convergence focus on income convergence (see e.g. Fischer & Pfaffermayr, 2018;Pietrzykowski, 2019;Peshev & Pirimova, 2020;Postiglione et al, 2020;Bernardelli et al, 2021). Papers on convergence in other variables are less common.…”