Institutions and business cycles

Abstract

This paper investigates the relationship between the main features of business cycles and the institutional and structural characteristics of 62 industrial, emerging and formerly centrally planned economies from all continents. We find that a variety of institutional indicators, including stronger governance, greater civil liberties, more developed labour and capital markets, and higher levels of central bank independence are significantly associated with business cycle characteristics namely, volatility and persistence. Our study also demonstrates that similarity of the institutional environment in dimensions such as governance and the level of labour and capital market development strongly affects the co-movement of business cycles across countries.