Government Size and Output Volatility: Is There a Relationship?

This paper provides some further tests for the proposition that bigger government leads to smaller output volatility. Both Gali and Fatas and Mihov have provided some evidence which appears to provide support to this proposition. The evidence is, however, based on relatively small sample of countries. In this study, we go beyond the OECD sample and focus on much larger World Bank data set with more than 150 countries. We also try to utilize some time series aspects of the data by using pooled cross-section time series data. Tests with different models and measures clearly point out that the original result is not very robust and the relationship between government size and output volatility is either nonexistent or quite weak at the best.