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Government Size and Output Volatility: New International Evidence

  • Erkki Koskela
  • Matti Virén
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    This paper re-examines the relationship between government size and output volatility from two perspectives. First, we use a wider international data set of 91 countries over the period 1980?1999 and thus not only the OECD data that have thus far been utilized. Second, we also allow for time series aspect by using panel data estimations. We have two new findings. First, the results from OECD countries about the negative relationship between output volatility and government size cannot be generalized to a wider international data set. Second, the relationship between government size and output volatility seems to be nonlinear. More precisely, the negative effect of government size on output volatility is significantly negative only for countries with high and small public sectors.

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    File URL: http://www.vatt.fi/file/vatt_publication_pdf/k339.pdf
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    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 339.

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    Date of creation: 08 Jul 2004
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    Handle: RePEc:fer:dpaper:339
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    1. Olivier Blanchard, 2000. "The automatic fiscal stabilizers: quietly doing their thing - commentary," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 69-74.
    2. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, March.
    3. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    4. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
    5. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    6. Wacziarg, Romain & Alesina, Alberto, 1998. "Openness, Country Size and Government," Scholarly Articles 4553014, Harvard University Department of Economics.
    7. Darrel Cohen & Glenn Follette, 1999. "The automatic fiscal stabilizers: quietly doing their thing," Finance and Economics Discussion Series 1999-64, Board of Governors of the Federal Reserve System (U.S.).
    8. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October.
    9. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
    10. Claus Thustrup Hansen & Henrik Jacobsen Kleven, 2000. "The Role of Taxes as Automatic Destabilizers in New Keynesian Economics," CESifo Working Paper Series 399, CESifo Group Munich.
    11. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    12. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    13. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
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