Economic Performance and Government Size
University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics)
João Tovar Jalles
University of Aberdeen - Business School; European Central Bank, DG Economics - Fiscal Policies Division
October 28, 2011
ECB Working Paper No. 1399
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.
Number of Pages in PDF File: 44
Keywords: Growth, institutions, fiscal rules, pooled mean group, common correlated effects
JEL Classification: C10, C23, H11, H30, O40
Date posted: November 30, 2011
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