Economic Performance and Government Size

44 Pages Posted: 30 Nov 2011  

Antonio Afonso

University of Lisbon - School of Economics and Management; UECE (Research Unit on Complexity and Economics)

João Tovar Jalles

International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: October 28, 2011

Abstract

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.

Keywords: Growth, institutions, fiscal rules, pooled mean group, common correlated effects

JEL Classification: C10, C23, H11, H30, O40

Suggested Citation

Afonso, Antonio and Jalles, João Tovar, Economic Performance and Government Size (October 28, 2011). ECB Working Paper No. 1399. Available at SSRN: https://ssrn.com/abstract=1950570

Antonio Afonso (Contact Author)

University of Lisbon - School of Economics and Management ( email )

Rua do Quelhas, n.º 6
Lisbon, 1200-781
Portugal

UECE (Research Unit on Complexity and Economics)

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~uece/

João Tovar Jalles

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

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