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Economic Performance and Government Size

  • António Afonso
  • João Tovar-Valles

We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth.

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File URL: http://pascal.iseg.utl.pt/~depeco/wp/wp212011.pdf
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Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2011/21.

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Date of creation: Oct 2011
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Handle: RePEc:ise:isegwp:wp212011
Contact details of provider: Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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  1. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
  2. António Afonso & Ludger Schuknecht & Vito Tanzi, 2010. "Income distribution determinants and public spending efficiency," Journal of Economic Inequality, Springer, vol. 8(3), pages 367-389, September.
  3. International Monetary Fund, 2010. "A Historical Public Debt Database," IMF Working Papers 10/245, International Monetary Fund.
  4. Agnello, Luca & Cimadomo, Jacopo, 2009. "Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach," Working Paper Series 1118, European Central Bank.
  5. Alberto Alesina & Eliana La Ferrara, 2000. "The Determinants of Trust," NBER Working Papers 7621, National Bureau of Economic Research, Inc.
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