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Economic Performance and Government Size

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  • António Afonso
  • João Tovar-Valles

Abstract

We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth.

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Bibliographic Info

Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2011/21.

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Date of creation: Oct 2011
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Handle: RePEc:ise:isegwp:wp212011

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Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

Related research

Keywords: growth; institutions; fiscal rules; pooled mean group; common correlated effects Classification-C10; C23; H11; H30; O40;

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  1. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
  2. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
  3. António Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Income distribution determinants and public spending efficiency," Journal of Economic Inequality, Springer, vol. 8(3), pages 367-389, September.
  4. Alberto Alesina & Eliana La Ferrara, 2000. "The Determinants of Trust," NBER Working Papers 7621, National Bureau of Economic Research, Inc.
  5. International Monetary Fund, 2010. "A Historical Public Debt Database," IMF Working Papers 10/245, International Monetary Fund.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Politicians' existential crisis
    by chris dillow in Stumbling and Mumbling on 2013-01-02 14:07:20
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Cited by:
  1. Halkos, George E. & Paizanos, Epameinondas Α., 2013. "The effect of government expenditure on the environment:An empirical investigation," Ecological Economics, Elsevier, vol. 91(C), pages 48-56.
  2. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 33, September.
  3. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "What determines the duration of a fiscal consolidation program?," NIPE Working Papers 17/2012, NIPE - Universidade do Minho.
  4. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "Are there change-points in the likelihood of a fiscal consolidation ending?," NIPE Working Papers 18/2012, NIPE - Universidade do Minho.
  5. L, Agnello. & R, M. Sousa., 2012. "How does Fiscal Consolidation Impact on Income Inequality?," Working papers 382, Banque de France.
  6. António Afonso & João Tovar Jalles, 2011. "Linking Investment and Fiscal Policies," Working Papers Department of Economics 2011/16, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Javed, Omer, 2013. "Determinants of Institutional Quality: A Case Study of IMF Programme Countries," MPRA Paper 51344, University Library of Munich, Germany.

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