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2013•RePEc: Research Papers in EconomicsOpen access

A Random Walk to Economic Freedom

Frank Hefner, Mark David Witte

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Abstract

Given the wide use of economic freedom in economic literature it is imperative to understand how economic freedom evolves. Results suggest that levels of economic freedom are dominated by random shocks. Using a test for stationarity devised by Westerlund and Larsson (2012) we are unable to reject the null hypothesis of a random walk. The changes to economic freedom also are mostly driven by random shocks with only a minor role played by country specific characteristics. Additionally, changes to economic freedom are partially reversed as increases (decreases) in one year are partially offset by decreases (increases) in the next year.

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What this paper is about

Given the wide use of economic freedom in economic literature it is imperative to understand how economic freedom evolves. Results suggest that levels of economic freedom are dominated by random shocks. Using a test for stationarity devised by Westerlund and Larsson (2012) we are unable to reject the null hypothesis of a random walk. The changes to economic freedom also are mostly driven by random shocks with only a minor role played by country specific characteristics. Additionally, changes to economic freedom are partially reversed as increases (decreases) in one year are partially offset by decreases (increases) in the next year.

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Available abstract

Given the wide use of economic freedom in economic literature it is imperative to understand how economic freedom evolves. Results suggest that levels of economic freedom are dominated by random shocks. Using a test for stationarity devised by Westerlund and Larsson (2012) we are unable to reject the null hypothesis of a random walk. The changes to economic freedom also are mostly driven by random shocks with only a minor role played by country specific characteristics. Additionally, changes to economic freedom are partially reversed as increases (decreases) in one year are partially offset by decreases (increases) in the next year.

Key concepts: Economic freedom, Index of Economic Freedom, Economics, Economic model, Degrees of freedom (physics and chemistry), Econometrics, Macroeconomics, Market economy

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