The Effect of Financial Openness Measure on the Government Size in Selected Countries

Authors

1 Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

2 Department of Economics, Allameh Mohaddes Nouri University, Nour, Iran.

Abstract

 decline in private sector investment expenditures, crowding-out effect, lack of conditions for optimal allocation of resources, reduction inefficiency, and the possibility of increasing inequality in income distribution are considered as the effects of increasing the government size according to many theoretical studies and empirical evidence. Hence, identifying the determinants of the government size and contribution of each of them is very important. In this study, in addition to inflation and economic growth rate, the effect of financial openness measures on the government size in selected countries such as Iran has been tested experimentally. In the present paper, Chinn and Ito's indicators are used as variables of financial openness measure. Also, to analyze the sensitivity of the results to the statistical sample, the econometric model for the two groups of countries with high and low GDP per capita (2000-2016) was estimated by the Generalized Moment Method (GMM). The results showed that in both groups of studied countries an increase in the degree of financial openness will reduce the size of the government, but this effect is more in countries with high GDP per capita and minimal in countries by low GDP per capita. In high GDP per capita countries, the relationship between inflation and government size is positive and significant, and the relationship between GDP per capita and government size is negative and significant. But the study of low GDP per capita countries shows a negative and significant relationship between inflation and government size and a positive and significant relationship between GDP per capita and government size. Besides, according to research findings, the economic growth rate has the largest impact on government size in both groups of countries.
 

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