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Government Size, Unemployment and Inflation Nexus in Eight Large Emerging Market Economies

Antonio Afonso, Hüseyin Sen () and Ayse Kaya ()
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Hüseyin Sen: Ankara Yildirim Beyazit University
Ayse Kaya: Izmir Kâtip Çelebi University

Hacienda Pública Española / Review of Public Economics, 2021, vol. 235, issue 1, 133-170

Abstract: Using annual data for a panel of eight large emerging market economies from 1980 to 2015, we uncover the underlying linkages between government size, unemployment, and inflation by using the panel cointegration and causality frameworks. Overall, our empirical results show that there exists a unidirectional causality running from government size to both unemployment and inflation. The results also tell that the impact of government size on unemployment and inflation varies with how government size is defined or measured. In the case of the ratio of government consumption spending to GDP is chosen as the proxy measure of government size, the causality is one-way and runs from government size to both unemployment and inflation. In addition, indirect taxes are in a significant positive causal association with unemployment, while direct taxes are in a close connection with inflation in the full-country sample.

Keywords: Government size; Unemployment; Inflation; Emerging market economies; Panel cointegration; Causality analysis. (search for similar items in EconPapers)
JEL-codes: E60 E61 E63 H10 (search for similar items in EconPapers)
Date: 2021
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