Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime. © 2011 Elsevier B.V.

Carmignani, F., Colombo, E., Tirelli, P., Macroeconomic risk and the (de)stabilising role of government size, <<EUROPEAN JOURNAL OF POLITICAL ECONOMY>>, 2011; 27 (4): 781-790. [doi:10.1016/j.ejpoleco.2011.04.002] [http://hdl.handle.net/10807/100219]

Macroeconomic risk and the (de)stabilising role of government size

Colombo, Emilio
Secondo
;
Tirelli, Patrizio
Ultimo
2011

Abstract

Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime. © 2011 Elsevier B.V.
2011
Inglese
Carmignani, F., Colombo, E., Tirelli, P., Macroeconomic risk and the (de)stabilising role of government size, <<EUROPEAN JOURNAL OF POLITICAL ECONOMY>>, 2011; 27 (4): 781-790. [doi:10.1016/j.ejpoleco.2011.04.002] [http://hdl.handle.net/10807/100219]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/100219
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