Macroeconomic Institutions and Development
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Macroeconomic Institutions and Development

Bilin Neyapti

The book incorporates the essential elements of institutional theory and highlights the issues pertaining to the measurement of institutional characteristics and the empirical analyses involving such measurement. It provides the theoretical framework of and empirical evidence on fiscal institutions, covering budgetary rules and procedures as well as fiscal decentralization, and reviews the theoretical framework for monetary institutions such as central bank independence, currency boards, monetary unions and inflation targeting in addition to providing empirical evidence on their effectiveness. The role of bank regulation and supervision is also investigated. This path-breaking and original book will prove a fascinating read for a wide-ranging audience including academics, think tanks, international development agencies and policymakers within the fields of development, economics, heterodox economics and money, banking and finance.
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Chapter 2: The Model and Empirics

Bilin Neyapti


2. The model and empirics This chapter discusses theoretical issues relevant to modeling institutional evolution and empirical issues regarding the estimation of the macroeconomic effects of institutions. In view of the institutional theories outlined previously, Chapter 2 first describes the dynamic aspects of institutional change in section 2.1 and then presents a formal model of institutional change in section 2.2. Next, section 2.3 lays out the measurement and estimation issues that are common to the empirical analyses involving institutional variables. 2.1 DYNAMICS OF INSTITUTIONAL CHANGE In light of the definitions of institutions and the underlying theories of institutional economics, it is clear that a formal model of institutional evolution must take into account the factors that affect the incentives for, facilitate the establishment of and explain the evolution or devolution of a particular type of institution; hence, the model should be dynamic. Subsections 2.1.1 and 2.1.2 review the sources of institutional change and the dynamics of different types of institutions, respectively. 2.1.1 Demand and Supply Sides of Institutional Change The literature suggests that the geography–religion–history trio is the deepest determinant of institutions (see, for example, Acemoglu et al., 2002; Easterly and Levine, 2003; Rodrik et al., 2002). Of these three factors, geography can be considered the deepest determinant since it determines 44 The model and empirics 45 the climate, natural resources and trading prospects of a country (see Sachs, 2003, for example). The trio also plays an important role in the formation of beliefs, informal norms and modes...

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