Working Paper: CEPR ID: DP10937
Authors: Alessandra Bonfiglioli; Gino Gancia
Abstract: Does economic uncertainty promote the implementation of structural reforms? We answer this question using one of the most exhaustive cross-country panel data set on reforms in six major areas and measuring economic uncertainty with stock market volatility. To address endogeneity concerns, we propose various identification strategies, instrumenting uncertainty with world shocks to volatility and with natural disasters, terrorist attacks, political coups and revolutions. Across all specifications, we find that uncertainty has a positive and significant effect on the adoption of reforms. This result is robust to the inclusion of a large number of controls, including political variables, economic variables, crisis indicators, and a host of country, reform and time fixed effects. These findings are broadly consistent with recent models suggesting that uncertainty promotes reforms by mitigating agency problems between policy makers and voters.
Keywords: reforms; uncertainty
JEL Codes: E02; E60; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market volatility (G17) | economic uncertainty (D89) |
| world shocks to volatility (E32) | stock market volatility (G17) |
| natural disasters (H84) | economic uncertainty (D89) |
| terrorist attacks (H84) | economic uncertainty (D89) |
| political coups (D72) | economic uncertainty (D89) |
| revolutions (P39) | economic uncertainty (D89) |
| economic uncertainty (D89) | adoption of structural reforms (E69) |