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Macroeconomic risk and the (de)stabilising role of government size

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  • Carmignani, Fabrizio
  • Colombo, Emilio
  • Tirelli, Patrizio

Abstract

Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime.

Suggested Citation

  • Carmignani, Fabrizio & Colombo, Emilio & Tirelli, Patrizio, 2011. "Macroeconomic risk and the (de)stabilising role of government size," European Journal of Political Economy, Elsevier, vol. 27(4), pages 781-790.
  • Handle: RePEc:eee:poleco:v:27:y:2011:i:4:p:781-790
    DOI: 10.1016/j.ejpoleco.2011.04.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Markus Leibrecht & Johann Scharler, 2015. "Government Size and Business Cycle Volatility: How Important are Credit Constraints?," Economica, London School of Economics and Political Science, vol. 82(326), pages 201-221, April.
    2. repec:hal:journl:halshs-00881198 is not listed on IDEAS
    3. Voia, Marcel-Cristian & Ferris, J. Stephen, 2013. "Do business cycle peaks predict election calls in Canada?," European Journal of Political Economy, Elsevier, vol. 29(C), pages 102-118.
    4. Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.
    5. repec:eee:rujoec:v:1:y:2015:i:1:p:55-80 is not listed on IDEAS
    6. Malginov, Georgiy & Radygin, Alexander, 2015. "Property management of the state treasury of the Russian Federation: some of the current trends," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 20-46.
    7. Luca Agnello & Ricardo M. Sousa, 2014. "The Determinants of the Volatility of Fiscal Policy Discretion," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 91-115, March.
    8. Thibault Darcillon, 2013. "What Causes Labor-Market Volatility? The Role of Finance and Welfare State Institutions," Documents de travail du Centre d'Economie de la Sorbonne 13070, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    9. Jetter, Michael, 2014. "Volatility and growth: Governments are key," European Journal of Political Economy, Elsevier, vol. 36(C), pages 71-88.

    More about this item

    Keywords

    Output volatility; Government expenditure; Trade openness; Financial openness; Political institutions;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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