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Macroeconomic risk and the (de)stabilising role of government size

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Author Info

  • Carmignani, Fabrizio
  • Colombo, Emilio
  • Tirelli, Patrizio

Abstract

Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 27 (2011)
Issue (Month): 4 ()
Pages: 781-790

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Handle: RePEc:eee:poleco:v:27:y:2011:i:4:p:781-790

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Web page: http://www.elsevier.com/locate/inca/505544

Related research

Keywords: Output volatility; Government expenditure; Trade openness; Financial openness; Political institutions;

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References

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Cited by:
  1. Thibault Darcillon, 2013. "What Causes Labor-Market Volatility? The Role of Finance and Welfare State Institutions," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00881198, HAL.
  2. Markus Leibrecht & Johann Scharler, 2012. "Government Size and Business Cycle Volatility; How Important Are Credit Constraints?," Working Paper Series in Economics, University of Lüneburg, Institute of Economics 237, University of Lüneburg, Institute of Economics.
  3. Thibault Darcillon, 2013. "What Causes Labor-Market Volatility? The Role of Finance and Welfare State Institutions," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13070, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series, European Central Bank 1380, European Central Bank.

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