The stabilizing role of government size

Javier Andrés (), Rafael Domenech () and Antonio Fatas ()

No 710, Banco de España Working Papers from Banco de España

Abstract: This paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. However, in the model, we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output. Given that empirically we also observe a negative correlation between government size and the volatility of consumption, we modify the model by introducing rule-of-thumb consumers. In this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in OECD economies over the last 45 years.

Keywords: government size; output volatility; automatic stabilizers (search for similar items in EconPapers)
JEL-codes: E32 E52 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Date: 2007-05
View list of references View citations in EconPapers

Downloads: (external link)
http://www.bde.es/webbde/SES/Secciones/Publicacion ... o/07/Fic/dt0710e.pdf First version, May 2007 (application/pdf)

Related works:
Working Paper: The Stabilizing Role of Government Size (2007)
Working Paper: The Stabilizing Role of Government Size (2004)
Journal Article: The stabilizing role of government size (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bde:wpaper:0710

Access Statistics for this paper

More papers in Banco de España Working Papers from Banco de España
Contact information at EDIRC.
Series data maintained by María D. González. Electronic Dissemination of Information Unit. Research Department. Banco de España ().