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

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

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.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 27 (2011)
Issue (Month): 4 ()
Pages: 781-790

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Handle: RePEc:eee:poleco:v:27:y:2011:i:4:p:781-790
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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