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Big Government, High Debt, and Fiscal Adjustment in Small States

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  • Rui Ota
  • Stephanie Medina Cas
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Abstract

Using a new fiscal dataset for small states, this paper analyzes the link between country size, government size, debt, and economic performance. It finds that on average small states have larger governments and higher public debt. Although there are intrinsic factors that explain why governments are bigger in small states, those with smaller governments and lower public debt tend to grow faster and are less vulnerable. Large fiscal adjustments, primarily through expenditure restraint, can underpin growth, although sometimes other elements can also impact. Since better governance is associated with lower debt, fiscal adjustment should be supported by governance improvements.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/39.

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Length: 45
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/39

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Related research

Keywords: Governance; Small states; Public debt; Exchange rate regimes;

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References

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  1. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2005. "Governance matters IV : governance indicators for 1996-2004," Policy Research Working Paper Series 3630, The World Bank.
  2. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 2003. "Trade, Growth, and the Size of Countries," Harvard Institute of Economic Research Working Papers 1995, Harvard - Institute of Economic Research.
  3. Wacziarg, Romain & Alesina, Alberto, 1998. "Openness, Country Size and Government," Scholarly Articles 4553014, Harvard University Department of Economics.
  4. 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.
  5. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
  6. Hans P. Lankes & Katerina Alexandraki, 2004. "The Impact of Preference Erosion on Middle-Income Developing Countries," IMF Working Papers 04/169, International Monetary Fund.
  7. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series 1998-09, Board of Governors of the Federal Reserve System (U.S.).
    • Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
  8. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  9. R A Read & H W Armstrong, 1998. "Trade and growth in small states: the impact of global trade liberalisation," Working Papers 539452, Lancaster University Management School, Economics Department.
  10. repec:lan:wpaper:898 is not listed on IDEAS
  11. repec:lan:wpaper:899 is not listed on IDEAS
  12. Rupa Duttagupta & Guillermo Tolosa, 2006. "Fiscal Discipline and Exchange Rate Regimes: Evidence from the Caribbean," IMF Working Papers 06/119, International Monetary Fund.
  13. Ratna Sahay, 2005. "Stabilization, Debt, and Fiscal Policy in the Caribbean," IMF Working Papers 05/26, International Monetary Fund.
  14. Yan Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund.
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