Regulations and economic growth: some empirical evidence based on the Bayesian model pooling

The paper aims to assess the impact of regulations (measured by the Heritage Foundation index of economic freedom) on economic growth. The method of the analysis is based on growth regressions where economic freedom is included in the set of explanatory variables, along with some other control factors. The dependent variable is GDP per capita growth rate. In order to be robust to the selection of explanatory variables, the paper uses Bayesian model pooling applied to Blundell and Bond’s GMM system estimator. Another innovative aspects are- the use of ‘moving’ panel data in which subsequent observations cover observations from partly overlapping periods as well as the inclusion of nonlinearities. The results show that the level of and the change in economic freedom both reveal a positive and nonlinear relationship with economic growth. A given increase in economic freedom has a greater impact on economic growth in those countries that are economically not (or partly) free.