Asymmetric interaction between government spending and terms of trade volatility: New evidence from hidden cointegration technique

Abdulnasser Hatemi-J, Manuchehr Irandoust

    Research output: Contribution to journalArticlepeer-review

    10 Citations (Scopus)

    Abstract

    Purpose: In the literature on the effects of economic globalization, the compensation hypothesis suggests that there is a positive link between government size and external risk as governments perform a risk mitigating role to insure against productivity shocks through transfers. In contrast, the conventional wisdom hypothesis states that more openness will lower tax rates and lead to smaller government due to increased international factor mobility which undermines the ability of governments to tax. The purpose of this paper is to test the literature and present the authors' conclusions. Design/methodology/approach: Using time series data for the USA, Canada, Japan and Australia over the period 1960-2008, the authors test the asymmetric relationship between government size and terms-of-trade volatility by applying multivariate hidden cointegration analysis. Findings: The findings show that high terms of trade volatility are positively related to government spending in the all sample countries. The effect is stronger in the case of positive movements than negative ones. Practical implications: The policy implication is that the size of the public sector might play a risk-reducing role in economies with significant amounts of external risk. In particular, public expenditure is considered to be an important fiscal policy instrument when terms of trade volatility are high. Originality/value: The paper describes the first study of its kind.

    Original languageEnglish
    Pages (from-to)368-378
    Number of pages11
    JournalJournal of Economic Studies
    Volume39
    Issue number3
    DOIs
    Publication statusPublished - Jul 2012

    Keywords

    • Asymmetry
    • Australia
    • Canada
    • Economic policy
    • Government
    • Government spending
    • Hidden cointegration
    • Japan
    • Terms of trade volatility
    • Trade
    • United States of America

    ASJC Scopus subject areas

    • General Economics,Econometrics and Finance

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