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Big Government, High Debt, and Fiscal Adjustment in Small States


  • Rui Ota
  • Stephanie Medina Cas


Using a new fiscal dataset for small states, this paper analyzes the link between country size, government size, debt, and economic performance. It finds that on average small states have larger governments and higher public debt. Although there are intrinsic factors that explain why governments are bigger in small states, those with smaller governments and lower public debt tend to grow faster and are less vulnerable. Large fiscal adjustments, primarily through expenditure restraint, can underpin growth, although sometimes other elements can also impact. Since better governance is associated with lower debt, fiscal adjustment should be supported by governance improvements.

Suggested Citation

  • Rui Ota & Stephanie Medina Cas, 2008. "Big Government, High Debt, and Fiscal Adjustment in Small States," IMF Working Papers 08/39, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/39

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    References listed on IDEAS

    1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    2. Harvey W. Armstrong & Robert Read, 1998. "Trade and Growth in Small States: The Impact of Global Trade Liberalisation," The World Economy, Wiley Blackwell, vol. 21(4), pages 563-585, June.
    3. Hans P Lankes & Katerina Alexandraki, 2004. "The Impact of Preference Erosionon Middle-Income Developing Countries," IMF Working Papers 04/169, International Monetary Fund.
    4. Reint Gropp & Liam P. Ebrill & Janet Gale Stotsky, 1999. "Revenue Implications of Trade Liberalization," IMF Occasional Papers 180, International Monetary Fund.
    5. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
    6. 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.
    7. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    8. Rupa Duttagupta & Guillermo Tolosa, 2006. "Fiscal Discipline and Exchange Rate Regimes; Evidence From the Caribbean," IMF Working Papers 06/119, International Monetary Fund.
    9. repec:lan:wpaper:898 is not listed on IDEAS
    10. Ratna Sahay, 2005. "Stabilization, Debt, and Fiscal Policy in the Caribbean," IMF Working Papers 05/26, International Monetary Fund.
    11. Yan M Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund.
    12. Alesina, Alberto & Spolaore, Enrico & Wacziarg, Romain, 2005. "Trade, Growth and the Size of Countries," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 23, pages 1499-1542 Elsevier.
    13. repec:lan:wpaper:899 is not listed on IDEAS
    14. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2005. "Governance matters IV : governance indicators for 1996-2004," Policy Research Working Paper Series 3630, The World Bank.
    15. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
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    More about this item


    Debt; Exchange rate regimes; Public debt; Small states; Governance; Fiscal policy; Transparency; Government size; fiscal adjustment; external debt; external public debt;

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