Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2003:14: Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment

Jonas Agell (), Henry Ohlsson () and Peter Skogman Thoursie ()
Additional contact information
Jonas Agell: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Henry Ohlsson: Dep. of Economics, Uppsala University, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 UPPSALA, Sweden
Peter Skogman Thoursie: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: In a recent article Stefan Fölster and Magnus Henrekson [2001] argue that “…the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity in a valid manner the regressions reported by Fölster/Henrekson are flawed. Moreover, using theoretically valid instruments we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. A policy-maker who wants to promote growth is well-advised to look for other evidence than cross-country growth regressions.

Keywords: Economic growth; public sector; cross-country regressions; panel regressions

JEL-codes: E62; H20; H50; O57

13 pages, November 6, 2003

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