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The impact of financial openness on the size of utility-enhancing government

  • Erauskin, Iñaki

In this paper, we employ a portfolio approach based on a two-country world to study the impact of financial openness on the size of government and on other key economic variables, including the consumption-wealth ratio, the growth rate of wealth, and welfare (assuming that public spending is utility enhancing). The model suggests that the size of government, the consumption-wealth ratio, and welfare should be greater in an open economy because of higher productivity and/or less volatility because of risk sharing. The theoretical results for the growth rate depend on differences in productivity and in consumption-wealth ratios. The empirical evidence - based on a sample of 49 countries from 1970 to 2009-broadly supports the main theoretical results of the model.

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Article provided by Kiel Institute for the World Economy (IfW) in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 7 (2013)
Issue (Month): ()
Pages: 1-56

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Handle: RePEc:zbw:ifweej:201338
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