Empirical studies of the relation between government size and economic growth come to widely different conclusions. In part this may reflect the fact that many studies report regressions that contain severe multicollinearity, heteroscedasticity, simultaneity and other specification problems. These econometric problems also mar robustness tests such as extreme bounds analyses. They risk identifying regression specifications as non-robust simply because they are econometrically flawed. In this paper an econometric panel study on a sample of rich countries covering the 1970-95 period is conducted. The tests are based on a regression model that addresses a number of the key econometric issues. Our general finding is that the greater the extent to which the econometric problems are solved, the more robust the relationship between government size and economic growth appears. Our most complete specifications are robust even according to the stringent extreme bounds criterion.
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Length: 21 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:iniesr:503
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Find related papers by JEL classification: E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General H50 - Public Economics - - National Government Expenditures and Related Policies - - - General O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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