Causality in the Freedom-Growth Relationship

This paper addresses the issue of causality in the relationship between various types of institutions—namely, political and economic freedom—and long-run economic growth. It is shown that existing empirical studies of these relationships provide evidence of correlation, but not causation. Granger causality tests of freedom vs. growth, and freedom vs. investment are conducted using aggregate measures of freedom as well as underlying components of freedom when available. The results suggest which aspects of freedom are most important in fostering growth in a causal sense. The paper closes with a causal analysis of changes in the different types of freedom themselves.