IMF Working Papers

Government Size and Intersectoral Income Fluctuation: An International Panel Analysis

Author/Editor:

Daehaeng Kim ; Chul-In Lee

Publication Date:

April 1, 2007

Electronic Access:

Link to data for this title

Summary:

Using the between-sector variation in income as a new measure of economic uncertainty, this paper proposes simple models and supportive empirical evidence for the causal relations between economic uncertainty and government size in the open economy setting. Key empirical findings include: (1) a larger government reduces economic uncertainty, and, at the same time, (2) an economy facing higher uncertainty has a larger government. However, (3) the government tends to resort to redistributive policies to reduce the uncertainty, while (4) government direct spending is also an effective option for the purpose. The study also finds that (5) cross-sectional measure of economic uncertainty tends to rise when a country becomes more open to international trade.

Series:

Working Paper No. 2007/093

Subject:

Expenditure Income shocks Labor Personal income Terms of trade