Economic freedom and economic crises

- I explore the association between economic freedom, and the crisis risk and characteristics.
- The sample covers 212 crises in the post-Cold War period 1993-2010.
- Results suggest that crisis risk and duration are not affected by economic freedom.
- Peak-to-trough GDP ratios and recovery times of crises are strongly associated with economic freedom.
- The regulatory components of economic freedom drive the results.

In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crises. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993-2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.