Can a growing welfare state induce a regime switch in the growth rate of an econ-omy? This paper constructs a dynamic political economy model of economic growth and the welfare state in which both variables are non-linearly related and jointly en-dogenous. Using a Markov switching framework over the period 1950-2001, we find that the structural decline in growth rates that several welfare state economies expe-rienced during 1970-1975 are preceded by movements to a high welfare state regime. This suggests that expanding welfare state regimes are associated with low economic growth regimes, while contracting welfare state regimes are associated with high growth regimes. However, we also find that the structural decline in growth rates leads to a downward structural break in the welfare state for many welfare state economies. This suggests that declining growth regimes are associated with contracting welfare state regimes, as lower growth forces politicians to cut the size of the welfare state. We also report strong evidence that both expansion and contractions in the welfare state affects growth non-linearly. These results are able to characterize a predictable and general pattern of welfare state–growth evolution.
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number
424.
Find related papers by JEL classification: P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
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References listed on IDEAS 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.:
Kiminori Matsuyama, 1996.
"Growing Through Cycles,"
Discussion Papers
1203, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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