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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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    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. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
    3. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
    4. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2003. "The role of taxes as automatic destabilizers in New Keynesian economics," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1123-1136, May.
    5. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
    6. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
    7. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    8. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, March.
    9. 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.).
    10. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    11. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
    12. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-51, August.
    13. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
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