In Takatoshi Ito and Andrew K. Rose eds. Growth and Productivity in East Asia, Chicago and London; The University of Chicago Press.
There is a growing consensus among economists that differences in institution, in particular the enforcement of property rights, rule of law, and constraints placed on politicians and elites, have a first–order effect on long–run economic development? Recent empirical findings support this notion. There is a strong correlation between institutions and economic financial development? especially when we look at the historically determined differences in institutions?
In this paper and a companion paper, Acemoglu et al. (2003), we argue that institutions also have a first–order effect ion short– and medium–run economic instability. We document that societies that have weak institutions for historical reasons have suffered substantially more output volatility and experienced more severe output, exchange rate, banking, and political crises over the past thirty years. The link we document between the historically determined component of institutions and economic instability calls for a quiet different view of medium–run macroeconomic volatility, and for more work to understand the relationship between institutions and volatility. This paper is therefore meant more as a progress report to encourage others to investigate these issues.