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Government spending volatility and the size of nations

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Author Info
Davide Furceri () (European Central Bank and University of Palermo. European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
Marcos Poplawski Ribeiro () (CEPII and University of Amsterdam. CEPII - Centre d’etudes prospectives et d’informations internationales, 9, rue Gerges Pitard - 75740, Paris, France.)

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Abstract

This paper provides empirical evidence showing that smaller countries tend to have more volatile government spending for a sample of 160 countries from 1960 to 2000. We argue that the larger size of a country decreases the volatility of government spending because it acts as an insurance against idiosyncratic shocks, and it leads to increasing returns to scale due to the higher ability of the government to spread its cost of financing over a larger pool of taxpayers. The results are robust to different time and country samples, different econometric techniques and to several sets of control variables. The analysis also evinces that country size is negatively related to the discretionary part of government spending and to the volatilities of most of the government spending items. JEL Classification: E62, H10.

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Paper provided by European Central Bank in its series Working Paper Series with number 924.

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Length: 40 pages
Date of creation: Aug 2008
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Handle: RePEc:ecb:ecbwps:20080924

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Related research
Keywords: Fiscal Policy; government size; fiscal volatility; country size.;

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This paper has been announced in the following NEP Reports: 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.:
  1. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Bolton, Patrick & Roland, Gerard, 1997. "The Breakup of Nations: A Political Economy Analysis," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1057-90, November.
    Other versions:
  3. Ruggles, Patricia & O'Higgins, Michael, 1981. "The Distribution of Public Expenditure among Households in the United States," Review of Income and Wealth, Blackwell Publishing, vol. 27(2), pages 137-64, June.
  4. Andrei Shleifer & Robert W. Vishny, 1998. "The Quality of Government," Harvard Institute of Economic Research Working Papers 1847, Harvard - Institute of Economic Research.
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  5. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November. [Downloadable!] (restricted)
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  6. Andrew K. Rose, 2006. "Size Really Doesn't Matter: In Search of a National Scale Effect," NBER Working Papers 12191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September. [Downloadable!] (restricted)
  8. Imbs, Jean, 2007. "Growth and volatility," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1848-1862, October. [Downloadable!] (restricted)
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  9. Fatás, Antonio & Mihov, Ilian, 2005. "Policy Volatility, Institutions and Economic Growth," CEPR Discussion Papers 5388, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Roel Beetsma & Xavier Debrun & Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," HEI Working Papers 04-2001, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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  11. António Afonso & Ludger Schuknecht & Vito Tanzi, 2006. "Public Sector Efficiency: Evidence for New EU Member States and Emerging Markets," Working Papers 2006/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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  12. Fatas, Antonio & Mihov, Ilian, 2006. "The macroeconomic effects of fiscal rules in the US states," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 101-117, January. [Downloadable!] (restricted)
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  13. Alesina, Alberto & Spolaore, Enrico & Wacziarg, Romain, 2005. "Trade, Growth and the Size of Countries," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 23, pages 1499-1542 Elsevier. [Downloadable!] (restricted)
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  14. Davide Furceri, 2007. "Is Government Expenditure Volatility Harmful for Growth? A Cross-Country Analysis," Fiscal Studies, Institute for Fiscal Studies, vol. 28(1), pages 103-120, 03. [Downloadable!] (restricted)
  15. Davide Furceri & Georgios Karras, 2008. "Business cycle volatility and country zize :evidence for a sample of OECD countries," Economics Bulletin, Economics Bulletin, vol. 5(3), pages 1-7. [Downloadable!]
  16. Furceri, Davide & Karras, Georgios, 2007. "Country size and business cycle volatility: Scale really matters," Journal of the Japanese and International Economies, Elsevier, vol. 21(4), pages 424-434, December. [Downloadable!] (restricted)
  17. Norman V. Loayza & Romain Rancière & Luis Servén & Jaume Ventura, 2007. "Macroeconomic Volatility and Welfare in Developing Countries: An Introduction," World Bank Economic Review, Oxford University Press, vol. 21(3), pages 343-357, October. [Downloadable!] (restricted)
  18. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December. [Downloadable!] (restricted)
  19. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August. [Downloadable!] (restricted)
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  20. Rose, Andrew K, 2005. "Size Really Doesn't Matter: In Search of a National Scale Effect," CEPR Discussion Papers 5350, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  21. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
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Full references

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. Carmen Martinez-Carrascal & Annalisa Ferrando, 2008. "Towards a monetary policy evaluation framework," Working Paper Series 943, European Central Bank. [Downloadable!]
  2. Gianluca Cafiso, 2008. "The euro's influence upon trade - Rose effect versus border effect," Working Paper Series 941, European Central Bank. [Downloadable!]
  3. Jukka Jalava & Ilja Kristian Kavonius, 2008. "The effect of durable goods and ICT on euro area productivity growth?," Working Paper Series 940, European Central Bank. [Downloadable!]
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