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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number
394.