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

By Jean Pisani-Ferry, Xavier Debrun, André Sapir

May 1, 2008

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Jean Pisani-Ferry, Xavier Debrun, and André Sapir. Government Size and Output Volatility: Should We Forsake Automatic Stabilization?, (USA: International Monetary Fund, 2008) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Automatic stabilizers, Consumption, Expenditure, Fiscal policy, Fiscal stabilization

Keywords: Expenditure-to-GDP ratio, Government expenditure, Government size, Monetary policy, OECD country, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/122
Stock No:

WPIEA2008122
ISBN:

9781451869828
ISSN:

1018-5941

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