Government size and macroeconomic stability

This article examines the potential role of government size in explaining differences in output volatility across OECD countries in the context of the latest recession. There is some evidence to suggest that government size as measured by the share of expenditure in GDP has a modest negative association with output volatility. Moreover, this link seems to have weakened further since the mid-1980s. Factors such as trade openness and exposure to terms-of-trade shocks as well as volatility of inflation appear important. Interestingly, the same set of factors seems to matter in explaining the severity of recession in OECD countries.

JEL classification: E6, E32, F41