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Economic performance and government size

Author

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  • Afonso, António
  • Jalles, João Tovar

Abstract

We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. JEL Classification: C10, C23, H11, H30, O40

Suggested Citation

  • Afonso, António & Jalles, João Tovar, 2011. "Economic performance and government size," Working Paper Series 1399, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111399
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    References listed on IDEAS

    as
    1. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
    2. António Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Income distribution determinants and public spending efficiency," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(3), pages 367-389, September.
    3. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
    4. Alberto Alesina & Eliana La Ferrara, 2000. "The Determinants of Trust," NBER Working Papers 7621, National Bureau of Economic Research, Inc.
    5. International Monetary Fund, 2010. "A Historical Public Debt Database," IMF Working Papers 10/245, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Politicians' existential crisis
      by chris dillow in Stumbling and Mumbling on 2013-01-02 20:07:20

    Citations

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    Cited by:

    1. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-33, September.
    2. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "Are there change-points in the likelihood of a fiscal consolidation ending?," NIPE Working Papers 18/2012, NIPE - Universidade do Minho.
    3. Halkos, George E. & Paizanos, Epameinondas Α., 2013. "The effect of government expenditure on the environment:An empirical investigation," Ecological Economics, Elsevier, vol. 91(C), pages 48-56.
    4. Agnello, Luca & Castro, Vitor & Sousa, Ricardo M., 2013. "What determines the duration of a fiscal consolidation program?," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 113-134.
    5. Javed, Omer, 2013. "Determinants of Institutional Quality: A Case Study of IMF Programme Countries," MPRA Paper 51344, University Library of Munich, Germany.
    6. Pawel Gajewski, 2014. "Sovereign spreads and financial market behavior before and during the crisis," Lodz Economics Working Papers 4/2014, University of Lodz, Faculty of Economics and Sociology.
    7. Robert Pater & Tomasz Skica, 2014. "The productivity of public and private sector in Poland," Business and Economic Horizons (BEH), Prague Development Center, vol. 10(2), pages 120-137, July.
    8. Luca Agnello & Ricardo M. Sousa, 2014. "How Does Fiscal Consolidation Impact on Income Inequality?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 702-726, December.
    9. Jean-Marc Fournier & Åsa Johansson, 2016. "The Effect of the Size and the Mix of Public Spending on Growth and Inequality," OECD Economics Department Working Papers 1344, OECD Publishing.
    10. Halkos, George, 2012. "The impact of government expenditure on the environment: An empirical investigation," MPRA Paper 39957, University Library of Munich, Germany.
    11. António Afonso & João Tovar Jalles, 2011. "Linking Investment and Fiscal Policies," Working Papers Department of Economics 2011/16, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    12. Javed, Omer, 2014. "Institutional quality, macroeconomic stabilization and economic growth: a case study of IMF programme countries," MPRA Paper 56370, University Library of Munich, Germany.
    13. repec:rss:jnljef:v3i2p1 is not listed on IDEAS
    14. repec:ana:journl:v:3:y:2017:i:2:p:3-24 is not listed on IDEAS
    15. Agnello, Luca & Castro, Vitor & Tovar Jalles, João & Sousa, Ricardo M., 2014. "Fiscal adjustments, labour market flexibility and unemployment," Economics Letters, Elsevier, vol. 124(2), pages 231-235.
    16. E. Tsanana & X. Chapsa & C. Katrakilidis, 2016. "Is growth corrupted or bureaucratic? Panel evidence from the enlarged EU," Applied Economics, Taylor & Francis Journals, vol. 48(33), pages 3131-3147, July.

    More about this item

    Keywords

    common correlated effects; fiscal rules; growth; institutions; pooled mean group;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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