An institutional approach to the role of the state in the distinctness of macroeconomic performance

In this study, the relationship and the tie between institutions and the economic system is examined in the context of the ability of the state to effect the economic performance. The role of the state in the interaction between institutions and economic performance is investigated through institutional change by asking if it is possible to construct more sound institutions via public economic policies. As a start, the Original Institutional Economics and the New Institutional Economics are handled, the other economic approaches under the institutional economics are examined and the touchpoints of those with the public finance are addressed. After explaining the basic concepts as economic performance and government size, the indicators of public finance; tax revenues, public debt and public expenditures are put forward by thinking their possible impacts on the institutional structure. In the last chapter of this study, the relationship between institutional quality and the public finance is analyzed emprically. Firstly, the impact of tax revenues, public debt and public expenditures on the institutional quality is estimated by using a dynamic panel data analysis tool System GMM. Secondly the impact of the public finance indicators on the institutional quality is estimated via panel time series methods as panel cointegration and panel error correction models. As a result, the estimates show that collecting less tax revenues, spending less from the public budget and borrowing less as a public body have positive impact on the institutional quality for the advanced economies. For the emerging economies, only tax revenues seem to have significant impacts on the institutional quality and the estimates say that collecting less tax revenues is better for the quality of institutions.