Government Size and Output Volatility

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.Government expenditures;Financial stability;Gross domestic product;government size, fiscal stabilization, government expenditure, government spending, fiscal policy, taxation, public finances, public expenditure, public spending, fiscal variables, tax burden, discretionary fiscal policy, fiscal affairs department, fiscal rules, fiscal stabilization policies, tax system, fiscal positions, fiscal policies, government sector, fiscal stabilizers, public finance, expenditure ratio, fiscal authorities, government revenue, increase in government expenditure, social security spending, fiscal affairs, government policies, fiscal retrenchment, discretionary fiscal policies, expenditure levels, tax collection, public budgets, tax revenue, tax rates, tax systems, budget balances, progressive taxation, fiscal discipline, fiscal institutions, general government expenditure, fiscal measures, tax bases, government expenditure ratio, aggregate demand, budget constraint, budget balance, fiscal aggregates, tax revenues