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The Stabilizing Role of Government Size

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Author Info
Andrés, Javier
Doménech, Rafael
Fatás, Antonio

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Abstract

This Paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. In the model, however, we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output. Given that empirically we also observe a negative correlation between government size and the volatility of consumption, we modify the model by introducing rule-of-thumb consumers. In this modified version of our initial model we observe that consumption volatility is also reduced when government size increases.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4384.

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Date of creation: May 2004
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Handle: RePEc:cpr:ceprdp:4384

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Related research
Keywords: automatic stabilizers; government size; output volatility;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Banco de España Working Papers 0809, Banco de España. [Downloadable!]
  2. Xavier Debrun & Jean Pisani-Ferry & André Sapir, 2008. "Government Size and Output Volatility: Should We Forsake Automatic Stabilization?," IMF Working Papers 08/122, International Monetary Fund. [Downloadable!]
  3. J.E. Boscá & A. Díaz & R. Doménech & J. Ferri & E. Pérez & L. Puch, 2007. "A Rational Expectations Model for Simulation and Policy Evaluation of the Spanish Economy," Working Papers 0706, International Economics Institute, University of Valencia. [Downloadable!]
  4. José Emilio Boscá & Javier Ferri & Rafa Doménech, 2009. "Search, Nash Bargaining and Rule of Thumb Consumers," Working Papers 0901, International Economics Institute, University of Valencia. [Downloadable!]
    Other versions:
  5. Jerome Creel & Francesco Saraceno, 2008. "Automatic Stabilisation, Discretionary Policy and the Stability Pact," Documents de Travail de l'OFCE 2008-15, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  6. René Cabral-Torres, . "Monetary and Fiscal Policy Coordination," Discussion Papers 05/28, Department of Economics, University of York. [Downloadable!]
  7. Jean-Paul Fitoussi & Francesco Saraceno, 2008. "The Intergenerational Content of Social Spending: Health Care and Sustainable Growth in China," Documents de Travail de l'OFCE 2008-27, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  8. Agustín Maravall & Ana del Río, 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Banco de España Working Papers 0728, Banco de España. [Downloadable!]
  9. Serena Lamartina & Andrea Zaghini, 2008. "Increasing Public Expenditures: Wagner’s Law in OECD Countries," CFS Working Paper Series 2008/13, Center for Financial Studies. [Downloadable!]
  10. Isabel Argimón & Pablo Hernández de Cos, 2008. "The determinants of budget balances of the regional (Autonomous) governments," Banco de España Working Papers 0803, Banco de España. [Downloadable!]
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