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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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Keywords: Governance; Small states; Public debt; Exchange rate regimes; fiscal adjustment; external debt; external public debt; fiscal policy; fiscal indicators; domestic debt; capital expenditure; fiscal discipline; government spending; fiscal data; fiscal position; fiscal balances; fiscal balance; public external debt; foreign capital; expansionary fiscal; government debt; fiscal deficits; government expenditures; total external debt; debt data; fiscal tightening; expenditure cuts; debt ratios; fiscal rigidities; fiscal transfers; fiscal policies; fiscal outcomes; external shocks; public sector debt; fiscal adjustments; fiscal affairs; fiscal affairs department; government revenue; debt sustainability; fiscal imbalances; domestic currency; expansionary fiscal contractions; expansionary fiscal policy; tax base; fiscal expansion; fiscal stance; fiscal targets; expenditure restraint; central bank; fiscal effort; debt exchange; fiscal contractions; private external debt; persistent fiscal deficits; external indebtedness; tax revenues; aggregate demand; loose fiscal policy; fiscal positions; debt problem; low debt; external shock; prudent fiscal policy; debt threshold; expenditure growth; expansionary fiscal policies; domestic debt data; government expenditure; fiscal database; tax system; debt problems; debt accumulation; taxation; debt dynamics; fiscal activity; fiscal variables; fiscal pressures;

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  1. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 885, C.E.P.R. Discussion Papers.
  2. Harvey W. Armstrong & Robert Read, 1998. "Trade and Growth in Small States: The Impact of Global Trade Liberalisation," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 21(4), pages 563-585, 06.
  3. Hans P. Lankes & Katerina Alexandraki, 2004. "The Impact of Preference Erosionon Middle-Income Developing Countries," IMF Working Papers 04/169, International Monetary Fund.
  4. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  5. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 2003. "Trade, Growth, and the Size of Countries," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1995, Harvard - Institute of Economic Research.
  6. Wacziarg, Romain & Alesina, Alberto, 1998. "Openness, Country Size and Government," Scholarly Articles 4553014, Harvard University Department of Economics.
  7. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
  8. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1399-1436, November.
  9. repec:lan:wpaper:898 is not listed on IDEAS
  10. Yan Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund.
  11. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2005. "Governance matters IV : governance indicators for 1996-2004," Policy Research Working Paper Series 3630, The World Bank.
  12. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-09, Board of Governors of the Federal Reserve System (U.S.).
  13. repec:lan:wpaper:899 is not listed on IDEAS
  14. Rupa Duttagupta & Guillermo Tolosa, 2006. "Fiscal Discipline and Exchange Rate Regimes," IMF Working Papers 06/119, International Monetary Fund.
  15. Ratna Sahay, 2005. "Stabilization, Debt, and Fiscal Policy in the Caribbean," IMF Working Papers 05/26, International Monetary Fund.
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