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Government size and output volatility: is there a relationship?

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  • Matti Virén

    (Bank of Finland)

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    Abstract

    This paper provides some further tests for the proposition that a larger public sector leads to smaller output volatility. Both Gali and Fatas & Mihov have provided some evidence which appears to support this proposition. Their evidence is, however, based on a relatively small sample of countries. In this study, we go beyond the OECD sample and focus on a much larger World Bank data set covering up to 208 countries for the period 1960–2002. We also seek to utilise some time series aspects of the material by using pooled cross-section time series data. Tests with different models and measures clearly indicate that the original results are not very robust and the relationship between government size and output volatility is either nonexistent or very weak at best.

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    File URL: http://128.118.178.162/eps/mac/papers/0508/0508025.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0508025.

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    Length: 28 pages
    Date of creation: 24 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0508025

    Note: Type of Document - pdf; pages: 28
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    Web page: http://128.118.178.162

    Related research

    Keywords: government; fiscal policy; automatic stabilisers;

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    References

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    1. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    2. Koskela, Erkki & Viren, Matti, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy.
    3. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October.
    4. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
    5. Ray Barrell & Ian Hurst & Álvaro Pina, 2002. "Fiscal Targets, Automatic Stabilisers and their Effects on Output," Working Papers Department of Economics 2002/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    6. Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile," IMF Working Papers 03/182, International Monetary Fund.
    7. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
    8. Wacziarg, Romain & Alesina, Alberto, 1998. "Openness, Country Size and Government," Scholarly Articles 4553014, Harvard University Department of Economics.
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