Government Size and Output Volatility: Should We Forsake Automatic Stabilization?

55 Pages Posted: 1 Jul 2008

See all articles by Xavier Debrun

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Jean Pisani-Ferry

Hertie School of Governance; French Prime Minister’s office

Andre Sapir

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Bruegel; Centre for Economic Policy Research (CEPR)

Date Written: May 2008

Abstract

The paper takes stock of the debate on the positive link between output volatility and the size of government - which reflects automatic stabilizers. After a survey of the literature, we show that the contribution of automatic stabilizers to output stability may have disappeared since the 1990s. However, econometric analysis suggests that the breakdown in the government size-volatility relationship largely reflects temporary developments (better monetary management and financial intermediation). Once these factors are taken into account, the stabilizing role of government size remains important although little extra stability can be gained by expanding public expenditure beyond 40 percent of GDP.

Keywords: Working Paper, Government expenditures, Financial stability, Gross domestic product

Suggested Citation

Debrun, Xavier and Pisani-Ferry, Jean and Sapir, Andre, Government Size and Output Volatility: Should We Forsake Automatic Stabilization? (May 2008). IMF Working Paper No. 08/122, Available at SSRN: https://ssrn.com/abstract=1153743

Xavier Debrun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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Washington, DC 20431
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Jean Pisani-Ferry

Hertie School of Governance ( email )

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Berlin, 10178
Germany

French Prime Minister’s office ( email )

Paris
France

Andre Sapir

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Brussels, B-1050
Belgium
+32 2 650 2345/4 (Phone)
+32 2 650 4475 (Fax)

Bruegel ( email )

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Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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