Working Paper: CEPR ID: DP2259
Authors: Antonio Fatas; Ilian Mihov
Abstract: This paper studies the role of automatic stabilizers using a sample of OECD countries and US states. We find that there is a strong and robust negative correlation between measures of government size and the volatility of output. This correlation is robust to the inclusion of a large set of controls as well as to alternative methods of detrending and estimation. The economic significance of this relationship is larger for the US states.
Keywords: Fiscal Policy; Automatic Stabilizers; Business Cycles; Intranational Economics
JEL Codes: E60; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government size controls for GDP per capita, average growth, and openness (H11) | Robustness of findings (C90) |
| Government size (measured as the ratio of expenditures or taxes to GDP) (H11) | Output volatility (C69) |
| Increase in government size by 1 percentage point of GDP (H19) | Output volatility (C69) |