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Government size and output volatility: is there a relationship?

  • Virén , Matti

    ()

    (University of Turku and Bank of Finland)

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    This paper provides some further tests for the proposition that a larger public sector leads to smaller out-put volatility. Both Gali and Fatas & Mihov have provided some evidence which appears to support this proposition. Their evidence is, however, based on a relatively small sample of countries. In this study, we go beyond the OECD sample and focus on a much larger World Bank data set covering up to 208 countries for the period 1960–2002. We also seek to utilise some time series aspects of the material by using pooled cross-section time series data. Tests with different models and measures clearly indicate that the original results are not very robust and the relationship between government size and output volatility is either nonexistent or very weak at best.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0508netti.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2005.

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    Length: 28 pages
    Date of creation: 11 May 2005
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2005_008
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/

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    1. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
    2. Ray Barrell & Ian Hurst & Álvaro Pina, 2002. "Fiscal Targets, Automatic Stabilisers and their Effects on Output," Working Papers Department of Economics 2002/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    3. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    4. Maria Antoinette Silgoner & Jesús Crespo-Cuaresma & Gerhard Reitschuler, 2003. "The Fiscal Smile: The Effectiveness and Limits of Fiscal Stabilizers," IMF Working Papers 03/182, International Monetary Fund.
    5. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
    6. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
    7. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
    8. Koskela, Erkki & Viren, Matti, 2003. "Government Size and Output Volatility: New International Evidence," Discussion Papers 857, The Research Institute of the Finnish Economy.
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