Investigating the Cross Country Causal Relationship between Institutions and Economic Performance: A Panel Cointegration Analysis

Abstract

This paper analyzes the long-run dynamics between quality of institutions measured by recently developed Index of institutionalized social technologies, and Economic performance in the sample of 84 countries covering the period 2002-2006. Panel cointegration tests and FM OLS (Fully Modified OLS) estimators are used to test for cointegration. Institutional quality and growth are found to have long run positive cointegrating relationship.