Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 391: Growth Effects of Government Expenditure and Taxation in Rich Countries

Stefan Fölster () and Magnus Henrekson ()
Additional contact information
Stefan Fölster: The Swedish Research Institute of Trade, Postal: SE-103 29 Stockholm, Sweden
Magnus Henrekson: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: A number of cross-country comparisons do not find a robust negative relationship between government size and economic growth. In part this may reflect the prediction in economic theory that a negative relationship should exist primarily for rich countries with large public sectors. In this paper an econometric panel study is conducted on a sample of rich countries covering the 1970-95 period. Extended extreme bounds analyses are reported based on a regression model that tackles a number of econometric issues. Our general finding is that the more econometric problems are addressed, the more robust the relationship between government size and economic growth appears. Our most complete specifications are robust even according to the stringent extreme bounds criterion.

Keywords: Economic growth; Extreme bounds analysis; Fiscal Policy; Government expenditure; Public sector; Taxation; Cross-country regressions; Panel regressions; Robustness test.

JEL-codes: E62; H20; H50; O23; O40

18 pages, June 20, 2000

Note: Published in the European Economic Review, 2001

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