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Government Size and Output Volatility

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Author Info

  • Jean Pisani-Ferry
  • Xavier Debrun
  • André Sapir

Abstract

The paper takes stock of the debate on the positive link between output volatility and the size of government-which reflects automatic stabilizers. After a survey of the literature, we show that the contribution of automatic stabilizers to output stability may have disappeared since the 1990s. However, econometric analysis suggests that the breakdown in the government size-volatility relationship largely reflects temporary developments (better monetary management and financial intermediation). Once these factors are taken into account, the stabilizing role of government size remains important although little extra stability can be gained by expanding public expenditure beyond 40 percent of GDP.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/122.

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Length: 53
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/122

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Related research

Keywords: Government expenditures; Financial stability; Gross domestic product; government size; fiscal stabilization; government expenditure; government spending; fiscal policy; taxation; public finances; public expenditure; public spending; fiscal variables; tax burden; discretionary fiscal policy; fiscal affairs department; fiscal rules; fiscal stabilization policies; tax system; fiscal positions; fiscal policies; government sector; fiscal stabilizers; public finance; expenditure ratio; fiscal authorities; government revenue; increase in government expenditure; social security spending; fiscal affairs; government policies; fiscal retrenchment; discretionary fiscal policies; expenditure levels; tax collection; public budgets; tax revenue; tax rates; tax systems; budget balances; progressive taxation; fiscal discipline; fiscal institutions; general government expenditure; fiscal measures; tax bases; government expenditure ratio; aggregate demand; budget constraint; budget balance; fiscal aggregates; tax revenues;

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References

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  1. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October.
  2. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  3. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 533-572, October.
  4. Chris Otrok, 1999. "On Measuring the Welfare Cost of Business Cycles," Virginia Economics Online Papers 318, University of Virginia, Department of Economics.
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  7. Andrés, Javier & Doménech, Rafael & Fatás, Antonio, 2004. "The Stabilizing Role of Government Size," CEPR Discussion Papers 4384, C.E.P.R. Discussion Papers.
  8. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  9. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
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  13. Khalid Sekkat & Marco Buti & Carlos Martinez-Mongay & Paul van den Noord, 2003. "Automatic fiscal stabilisers in EMU: a conflict between efficiency and stabilization?," ULB Institutional Repository 2013/7354, ULB -- Universite Libre de Bruxelles.
  14. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2008. "Explaining the Great Moderation: it is not the shocks," Working Paper Series 0865, European Central Bank.
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  16. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  17. de la Fuente, Angel, 1997. "Fiscal Policy and Growth in the OECD," CEPR Discussion Papers 1755, C.E.P.R. Discussion Papers.
  18. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
  19. Carlos Martinez-Mongay & Khalid Sekkat, 2005. "Progressive Taxation, Macroeconomic Stabilization and efficiency in Europe," European Economy - Economic Papers 233, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  20. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  21. Afonso, António & Ebert, Werner & Schuknecht, Ludger & Thöne, Michael, 2005. "Quality of public finances and growth," Working Paper Series 0438, European Central Bank.
  22. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  23. André Sapir & Philippe Aghion & Giuseppe Bertola & Martin Hellwig & Jean Pisani-Ferry & Bernard Lange & José Viñals & Helen Wallace & Marco Buti & Mario Nava & Peter Smith, 2004. "An agenda for a growing Europe: the Sapir report," ULB Institutional Repository 2013/8070, ULB -- Universite Libre de Bruxelles.
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Citations

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Cited by:
  1. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.
  2. Li, Cheng, 2010. "Government Size and Macroeconomic Stability: Sub-National Evidence from China," MPRA Paper 28226, University Library of Munich, Germany.
  3. Marco Buti & Alessandro Turrini & Paul Noord & Pietro Biroli, 2009. "Defying the ‘Juncker curse’: can reformist governments be re-elected?," Empirica, Springer, vol. 36(1), pages 65-100, February.
  4. Facundo Albornoz & Joan Esteban & Paolo Vanin, 2009. "Government Information Transparency," Working Papers 392, Barcelona Graduate School of Economics.
  5. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.
  6. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.
  7. Klomp, Jeroen & de Haan, Jakob, 2009. "Political institutions and economic volatility," European Journal of Political Economy, Elsevier, vol. 25(3), pages 311-326, September.

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