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Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment

In a recent article Stefan Fölster and Magnus Henrekson [2001] argue that “…the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity in a valid manner the regressions reported by Fölster/Henrekson are flawed. Moreover, using theoretically valid instruments we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. A policy-maker who wants to promote growth is well-advised to look for other evidence than cross-country growth regressions.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2003:14.

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Length: 13 pages
Date of creation: 06 Nov 2003
Date of revision:
Handle: RePEc:hhs:sunrpe:2003_0014
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Web page: http://www.ne.su.se/
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  1. Boozer, Michael A., 1997. "Econometric Analysis of Panel Data Badi H. Baltagi Wiley, 1995," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October.
  2. Fölster, Stefan & Henrekson, Magnus, 2000. "Growth Effects of Government Expenditure and Taxation in Rich Countries," SSE/EFI Working Paper Series in Economics and Finance 391, Stockholm School of Economics.
  3. Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
  4. N. Gregory Mankiw, 1995. "The Growth of Nations," Harvard Institute of Economic Research Working Papers 1732, Harvard - Institute of Economic Research.
  5. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  6. Atkinson, Anthony B., 1995. "The Welfare State and Economic Performance," National Tax Journal, National Tax Association, vol. 48(2), pages 171-98, June.
  7. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1999. "Growth and the public sector: A reply," European Journal of Political Economy, Elsevier, vol. 15(2), pages 359-366, June.
  8. Ohlsson, H. & Agell, J. & Lindh, T., 1995. "Growth and the Public Sector: A Critical Review Essay," Papers 1995-09, Uppsala - Working Paper Series.
  9. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  10. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  11. Stephen Bond & Anke Hoeffler & Jonathan Temple, 2001. "GMM Estimation of Empirical Growth Models," Economics Papers 2001-W21, Economics Group, Nuffield College, University of Oxford.
  12. Fölster, Stefan & Henrekson, Magnus, 1997. "Growth and the Public Sector: A Critique of the Critics," Working Paper Series 492, Research Institute of Industrial Economics, revised 10 Jun 1998.
  13. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
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