Fvlster and Henrekson (1998) claim that they, by addressing a number of econometric problems, can establish that it is likely that economies with a large public sector grow more slowly than economies with a small public sector. But their regressions are fundamentally flawed. Re-estimating their growth equation using theoretically valid instruments, we find that the growth effect of the public sector is statistically insignificant, and much smaller than the point-estimates reported by Fvlster and Henrekson. This is consistent with the agnostic conclusion, drawn by us and many others, that cross-country growth regressions are unlikely to give a reliable answer to whether a large public sector is growth promoting or retarding.
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Paper provided by Uppsala - Working Paper Series in its series Papers with number
1999:1.
Length: 10 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:uppaal:1999:1
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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 O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
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