Discussion Papers, Center for European Governance and Economic Development Research 255
The role of regulatory quality as one of the so-called deep determinants of growth has emerged as an important issue in economic research in the past 20 years. The positive or negative growth effects of a country´s regulatory framework are amplified by economic integration, which makes factors and producers more mobile and enables them to avoid burdensome regulation. Therefore, the two potential determinants to growth might be interlinked. So far there is very little empirical evidence on the impact of the regulatory framework in an integrated economy on growth. We deal with the most common problems in estimating growth equations by using internal instruments to identify a causal relationship between regulation and growth in the presence of international trade and find evidence that both regulation and trade have a significant positive influence on growth, with the effect of regulation being especially pronounced for countries that have worse regulatory quality and for middle-income countries.