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Government Size and Intersectoral Income Fluctuation: An International Panel Analysis

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Author Info
Daehaeng Kim
Chul-In Lee

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Abstract

Using the between-sector variation in income as a new measure of economic uncertainty, this paper proposes simple models and supportive empirical evidence for the causal relations between economic uncertainty and government size in the open economy setting. Key empirical findings include: (1) a larger government reduces economic uncertainty, and, at the same time, (2) an economy facing higher uncertainty has a larger government. However, (3) the government tends to resort to redistributive policies to reduce the uncertainty, while (4) government direct spending is also an effective option for the purpose. The study also finds that (5) cross-sectional measure of economic uncertainty tends to rise when a country becomes more open to international trade.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/93.

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Length: 34 pages
Date of creation: 18 Apr 2007
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Handle: RePEc:imf:imfwpa:07/93

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Keywords: Income Economic stabilization Government expenditures Trade policy Economic models

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