Macroeconomic stability and economic growth in developing countries

Abstract

The debate on the importance of macroeconomic management for investment and growth in developing countries, was one that received much attention during the 1990s. One of the contributions in this debate was Michael F. Bleaney's "Macroeconomic stability, investments and economic growth in developing countries" published in Journal of development economics. He shows that his indicators of macroeconomic instability are negatively associated with growth, but not with investment. This thesis expands the analysis of Bleaney, to control for country fixed effects. I show that his estimates are subject to omitted variable bias, and that they are dependent on single outliers. However, my results also indicate that very high levels of inflation and initial government debt are negatively associated with economic growth. I argue that this might be because high initial government debt disables the government of borrowing, and that this has adverse both public and private investments, and because inflation crises cause strong economic contractions.