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Government Size and Intersectoral Income Fluctuation; An International Panel Analysis

  • Daehaeng Kim
  • Chul-In Lee

Using the between-sector variation in income as a new measure of economic uncertainty, this paper proposes simple models and supportive empirical evidence for the causal relations between economic uncertainty and government size in the open economy setting. Key empirical findings include: (1) a larger government reduces economic uncertainty, and, at the same time, (2) an economy facing higher uncertainty has a larger government. However, (3) the government tends to resort to redistributive policies to reduce the uncertainty, while (4) government direct spending is also an effective option for the purpose. The study also finds that (5) cross-sectional measure of economic uncertainty tends to rise when a country becomes more open to international trade.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/93.

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Length: 34
Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/93
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  1. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, 06.
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  3. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
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  6. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
  7. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  8. 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).
  9. Shang-Jin Wei & Yi Wu, 2001. "Globalization and Inequality: Evidence from Within China," NBER Working Papers 8611, National Bureau of Economic Research, Inc.
  10. Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
  11. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  12. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  13. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
  14. Chen, Shiu-Sheng, 2003. "Macroeconomic fluctuations and welfare cost of stabilization policy," Journal of Policy Modeling, Elsevier, vol. 25(2), pages 123-135, February.
  15. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
  16. Frank Balle & Ashish Vaidya, 2002. "A regional analysis of openness and government size," Applied Economics Letters, Taylor & Francis Journals, vol. 9(5), pages 289-292.
  17. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  18. 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.
  19. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
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