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Asymmetric interaction between government spending and terms of trade volatility

Author

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  • Abdulnasser Hatemi‐J
  • Manuchehr Irandoust

Abstract

Purpose - In the literature on the effects of economic globalization, the compensation hypothesis suggests that there is a positive link between government size and external risk as governments perform a risk mitigating role to insure against productivity shocks through transfers. In contrast, the conventional wisdom hypothesis states that more openness will lower tax rates and lead to smaller government due to increased international factor mobility which undermines the ability of governments to tax. The purpose of this paper is to test the literature and present the authors' conclusions. Design/methodology/approach - Using time series data for the USA, Canada, Japan and Australia over the period 1960‐2008, the authors test the asymmetric relationship between government size and terms‐of‐trade volatility by applying multivariate hidden cointegration analysis. Findings - The findings show that high terms of trade volatility are positively related to government spending in the all sample countries. The effect is stronger in the case of positive movements than negative ones. Practical implications - The policy implication is that the size of the public sector might play a risk‐reducing role in economies with significant amounts of external risk. In particular, public expenditure is considered to be an important fiscal policy instrument when terms of trade volatility are high. Originality/value - The paper describes the first study of its kind.

Suggested Citation

  • Abdulnasser Hatemi‐J & Manuchehr Irandoust, 2012. "Asymmetric interaction between government spending and terms of trade volatility," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(3), pages 368-378, July.
  • Handle: RePEc:eme:jespps:v:39:y:2012:i:3:p:368-378
    DOI: 10.1108/01443581211245937
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    Citations

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    Cited by:

    1. Economou, Fotini & Panagopoulos, Yannis & Tsouma, Ekaterini, 2018. "Uncovering asymmetries in the relationship between fear and the stock market using a hidden co-integration approach," Research in International Business and Finance, Elsevier, vol. 44(C), pages 459-470.
    2. Murat Gündüz, 2020. "Healthcare expenditure and carbon footprint in the USA: evidence from hidden cointegration approach," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 21(5), pages 801-811, July.

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