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The impact of financial openness on the size of utility-enhancing government

  • Erauskin, Iñaki

This paper studies the impact of financial openness on the size of government, and other key economic variables, such as the consumption-wealth ratio, the growth rate of wealth, and welfare, in a two-country world, based on a portfolio approach, assuming that public spending is utility-enhancing. The model suggests that the size of government, the consumption-wealth ratio, and welfare should be higher in an open economy due to a higher productivity and/or less volatility through risk sharing. The theoretical results for the growth rate depend on differences on productivities and consumption-wealth ratios. The empirical evidence based on a sample of 50 countries for the period 1970-2009 broadly supports the main theoretical results of the model, even though the inclusion of Singapore distorts sometimes the broad picture.

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Paper provided by Kiel Institute for the World Economy (IfW) in its series Economics Discussion Papers with number 2013-7.

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Date of creation: 2013
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Handle: RePEc:zbw:ifwedp:20137
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