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In this paper we analyse how the availability of credit influences the relationship between government size as a proxy for fiscal stabilization policy and the amplitude of business cycle fluctuations in a sample of advanced OECD countries. Interpreting relatively low loan-to-value ratios as an indication of tight credit constraints, we find that government size exerts a stabilizing effect on output and consumption growth fluctuations only when credit constraints are relatively tight. Our results provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy. [ABSTRACT FROM AUTHOR]

We examine how public policies affect life satisfaction across the industrial democracies. We consider as indicators of policy overall levels of government spending, the size and generosity of the welfare state, and the degree of labor market regulation. Using individual- and aggregate-level data for OECD countries from 1981 to 2007, we find robust evidence that citizens find life more satisfying as the degree of government intervention in the economy increases. We find, further, that this result is inelastic to changes in income; that is, high- and low-income citizens appear to find more “leftist” social policies equally conducive to their subjective well-being. We conclude with a discussion of the practical and theoretical implications of the results. [ABSTRACT FROM PUBLISHER]

We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture the fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades. [ABSTRACT FROM AUTHOR]

We analyze the impact of ideology on the size of government. In a simple model, the government sets redistribution and provision of public services according to the preferences of the median voter. Ideology is defined in terms of preferences for public services, and the impact of ideology on the size of government is shown to increase with mean income. This idea is tested using measures of ideology based on party manifestos. We show that the interaction of ideology and mean income has a major role in explaining the increase and divergence in government size observed across OECD countries. [ABSTRACT FROM AUTHOR]

This study examines the role of government size in explaining the differences in economic growth rates of the 19 Organization for Economic Co-operation and Development (OECD) countries over the 1971–1999 period using a random coefficients model. Our results indicate that, on average, total factor productivity growth, as well as the productivity of capital, are weaker in countries where government size is larger. The advantage of a small government sector, in general, likely reflects the greater efficiencies resulting from fewer policy-induced distortions (such as the burden of taxation), the greater discipline of market forces which fosters efficiency of resource use, and the absence of crowding-out effects that weaken the incentives to create new capital which embodies new technologies. From a policy perspective, this does not mean that the optimal policy is one that minimizes the size of government. Rather, a small as opposed to a large government could potentially be as effective in providing the legal, administrative, and governance infrastructure critical for growth, as well as for offsetting market failures. At the same time, the country-specific results indicate that the nature of country-specific institutions as well as the mix of government activities are as important for growth performance as the aggregate size of government. [Copyright &y& Elsevier]