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Macroeconomic risk and the size of government- do globalisation andinstitutions matter?

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We present an empirical model where output growth volatility and government expenditure are jointly endogenous and both are affected by policies and institutions. We ¯nd that output volatility increases government expenditure, but higher expenditure, causes greater out-put volatility. This suggests that discretionary government intervention is destabilising. Trade openness drives both higher expenditure and greater output volatility. Financial openness instead disciplines the size of government. Political institutions that strengthen policymaker's ac-countability towards the electorate result in lower expenditure and, in-directly, contribute to output stabilisation. Institutional arrangements concerning the central bank are not neutral: a more independent centralbank calls for lower output volatility.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 394.

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Date of creation: 2009
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Handle: RePEc:qld:uq2004:394

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  1. Menzie D. Chinn & Hiro Ito, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," NBER Working Papers 11370, National Bureau of Economic Research, Inc.
  2. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2003. "Exchange Rate Regimes: Choices and Consequences," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072408, December.
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