On the causal relationship between trade-openness and government-size: evidence from OECD countries

Hassan Molana, Catia Montagna and Mara Violato

International Journal of Public Policy, 2011, vol. 7, issue 4/5/6, 226-249

Abstract: The compensation hypothesis predicts a positive causation from international economic openness to the size of the public sector, as governments step in to perform a risk mitigating role to counterbalance the increasing exposure to external risk and the economic dislocations caused by growing international openness. We use time series data from 22 OECD countries over the period 1955-2003 and examine the statistical significance of both long-run and short-run causality channels in each country separately. Our findings fail to provide an overwhelming support for this hypothesis, with only five countries showing some evidence in its favour.

Keywords: globalisation; compensation hypothesis; government size; Clive Granger; causality tests; cointegration; vector error correction; trade openness; causal relationships; OECD; Organisation for Economic Co-operation and Development; positive causation; economic openness; public sector; central government; risk mitigation; external risks; economic dislocations; international openness; long-run causality channels; short-run causality channels; Australia; Austria; Belgium; Canada; Denmark; Finland; France; Greece; Iceland; Ireland; Italy; Japan; Luxembourg; Holland; Netherlands; New Zealand; Norway; Portugal; Spain; Sweden; Switzerland; United Kingdom; UK; United States; USA; public policy. (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijpubp:v:7:y:2011:i:4/5/6:p:226-249

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