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EMU and the Size of the Public Sector

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  • Erik Mäkelä

Abstract

The purpose of this paper is to examine whether membership in the EMU increases the size of the public sector. The estimation of the effect of the EMU on the ratio of government outlays to GDP is based on synthetic counterfactuals. It is found that the average size of the public sector in the EMU countries is higher than what it would have been without the monetary unification. The estimated effects are particularly strong in countries that have had the most unstable governments and the highest level of political competition in the eurozone. These findings support the hypothesis that political distortions of short-sighted governments that produce excessive deficits already under monetary autonomy may be worsened by accession to the monetary union.

Suggested Citation

  • Erik Mäkelä, 2018. "EMU and the Size of the Public Sector," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 74(2), pages 200-234, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201806)72:2_200:eatsot_2.0.tx_2-1
    DOI: 10.1628/fa-2018-0004
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    More about this item

    Keywords

    monetary union; euro; government spending; synthetic control method;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other

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