Martin Stojanovikj

We examine how extractive institutions affect the timing of the takeoff to sustained economic growth, the pace of industrialization, and the long-run balanced growth path of an economy. The politically dominant ruling elite can choose to extract a share of output and/or to interfere with creative destruction by extracting innovation resources. In so doing, the ruling elite needs to balance its desire for grabbing a greater share of resources with the constraint of being able to stay in power. We show that extraction from output delays the takeoff to sustained economic growth and reduces economic growth in the early industrial period. However, taken by itself, output extraction does not reduce the long-run balanced growth rate. By contrast, if the ruling elite interferes with creative destruction by extracting resources meant for innovation, it suppresses economic growth during industrialization and along the balanced growth path. After deriving the main results analytically, we calibrate the model to the U.S. economy to illustrate the adverse long-run development effects of extractive institutions. According to our results, institutions and policies that reduce the extractive power of the ruling elite can boost economic development to a substantial degree.

This study examines how patent protection, research and development (R&D) subsidies, and their interaction affect economic growth within a vertically integrated (downstream–upstream) Schumpeterian framework. The relative R&D productivity of each sector determines how these policy tools influence innovation and growth. When the upstream R&D sector is relatively more productive, stronger patent breadth and R&D subsidies in that sector promote growth; the same holds for the downstream sector when it is more productive. Within each sector, patents and R&D subsidies act as complements, but they compete across sectors: downstream R&D subsidies amplify the growth effect of downstream patent strength, while reducing gains from upstream patents, and upstream R&D subsidies have the opposite effect. The model is calibrated using U.S. data to quantitatively evaluate the magnitude of these growth effects.

Empirical evidence suggests that stronger patent protection has, at most, a modest positive effect on economic growth. However, Schumpeterian growth models yield a wide range of predictions, ranging from positive to significantly negative effects on economic growth. In this study, we develop a Schumpeterian growth model incorporating an endogenous innovation scale, a generalized innovation function integrating R&D lab equipment and labor-embodied technical knowledge, and an effect related to the complexity of innovation. Plausible calibrations suggest that, in accordance with the evidence, a typical OECD economy is situated near the peak of an inverted-U-shaped curve, wherein enhanced patent protection has little or no effect on growth. In economies with high innovation arrival rates or large markups, the effect may even be negative.

This paper examines the macroeconomic, financial, and institutional factors that affect the adoption of inflation targeting vis-a-vis alternative monetary policy strategies for 44 emerging market economies during 1990–2017. We employ a multinomial logistic regression with inflation targeting and exchange rate pegs as treatment groups, and intermediary monetary strategies as the baseline group. The main findings from our study are as follows: higher average inflation is associated with lower probability of adopting inflation targeting; while both output growth and its volatility make the adoption of inflation targeting less likely. Concerning the effects of the control variables, financial sector development, central bank independence, greater exposure to capital flows, and the level of economic development are all associated with higher likelihood of adopting inflation targeting, whereas higher public debt, trade openness, and money growth have the opposite effect. Macroeconomic conditions seem to have different impact on the choice of inflation targeting and exchange rate pegs, whereas similar institutional conditions are conducive to the implementation of both regimes. Finally, the effects of macroeconomic and institutional conditions do not depend on the type of inflation targeting.

In this paper, we study whether adopting inflation targeting in emerging market economies affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 40 emerging market economies during 1990–2017, we provide evidence that adopting inflation targeting is not associated with lower sacrifice ratios in emerging market economies. Specifically, we show that, controlling for the macroeconomic and institutional environment in EMEs, the choice of monetary regimes does not matter for disinflation costs. We also find that, when starting from low to moderate initial inflation, the speed of disinflation (shock therapy versus gradual disinflation) does not matter in these economies. Moreover, we show that trade openness is associated with lower sacrifice ratios, while we obtain opposite results for central bank independence. However, the impact of these factors on sacrifice ratios is rather small. Our main findings are robust to alternative classifications of the inflation targeting regime, alternative definitions of disinflation episodes, different peak levels of trend inflation rate, and across various specifications of the empirical model.

This paper examines the role of inflation targeting as a price signaling mechanism reducing price information asymmetry and potentially reducing incentives for corruptive actions through its direct control on the inflation rate, thus simultaneously increasing institutional quality. The obtained evidence suggests that adopting inflation targeting lowers corruption in a sample of 61 developing countries for the period between 1990 and 2018. Countries that have adopted inflation targeting experience lower corruption levels, as measured by the corruption perceptions (CP) index, controlling for other relevant determinants of corruption identified in the empirical literature, such as inflation, level of income, income distribution, trade openness and the rule of law. This result is sensitive to the type of inflation targeting adopted. Soft (unofficial) inflation targeting has no significant effect on the corruption level, giving support to the claim that strong institutional commitment, accompanied by transparency and constant communication with regards to inflation targets by the central bank, provides an adequate price signaling mechanism. In addition, the analysis provides evidence that an efficient rule of law reduces corruption levels significantly, although its effects are rather modest to support the claims that it can solely lessen corruptive behavior in the sample of developing countries.

In this paper I analyze how government size used as a proxy for fiscal stabilization policy and inflation targeting influence the amplitude of the business cycle and private consumption volatility in a sample of developing countries, for the period between 1990 and 2018. Taking into account the potential endogeneity of these variables, and controlling for the exogenous variation in trade openness, the analysis provides strong evidence that government size significantly reduces business cycle volatility while it exerts no significant impact on private consumption volatility. On the other hand, adopting inflation targeting significantly increases the amplitude of the volatility of real output growth, while significantly decreasing private consumption volatility. The implemented form of the inflation targeting regime does not introduce any significant changes in the obtained results. The findings seem to provide evidence that there is a potential for an improved coordination between fiscal and monetary policy actions in developing countries that have adopted inflation targeting.

This paper examines the macroeconomic effects of inflation targeting in 44 emerging market economies (EMEs) during 1970–2017. We estimate a dynamic panel data model, taking into account the endogeneity of the inflation targeting regime and controlling for a variety of factors affecting macroeconomic performance in EMEs. The main findings from our empirical investigation are as follows: First, inflation targeting is associated with lower average inflation, though its favorable effects, as compared to alternative monetary strategies, are negligible; second, we provide firm evidence against the proposition that inflation targeting lowers inflation volatility. Our results are robust with respect to various modifications in the estimation procedure and to the inclusion of additional control variables.