Title: On the causal relationship between trade-openness and government-size: evidence from OECD countries

Authors: Hassan Molana; Catia Montagna; Mara Violato

Addresses: Economic Studies, University of Dundee, Dundee, DD1 4HN, UK. ' Economic Studies, University of Dundee, Dundee, DD1 4HN, UK; Centre for Research on Globalisation and Economic Policy, University of Nottingham, University Park, Nottingham, NG7 2RD, UK. ' Department of Public Health, University of Oxford, Old Road Campus, Headington, Oxford, OX3 7LF, UK

Abstract: The compensation hypothesis predicts a positive causation from international economic openness to the size of the public sector, as governments step in to perform a risk mitigating role to counterbalance the increasing exposure to external risk and the economic dislocations caused by growing international openness. We use time series data from 22 OECD countries over the period 1955-2003 and examine the statistical significance of both long-run and short-run causality channels in each country separately. Our findings fail to provide an overwhelming support for this hypothesis, with only five countries showing some evidence in its favour.

Keywords: globalisation; compensation hypothesis; government size; Clive Granger; causality tests; cointegration; vector error correction; trade openness; causal relationships; OECD; Organisation for Economic Co-operation and Development; positive causation; economic openness; public sector; central government; risk mitigation; external risks; economic dislocations; international openness; long-run causality channels; short-run causality channels; Australia; Austria; Belgium; Canada; Denmark; Finland; France; Greece; Iceland; Ireland; Italy; Japan; Luxembourg; Holland; Netherlands; New Zealand; Norway; Portugal; Spain; Sweden; Switzerland; United Kingdom; UK; United States; USA; public policy.

DOI: 10.1504/IJPP.2011.043562

International Journal of Public Policy, 2011 Vol.7 No.4/5/6, pp.226 - 249

Received: 22 Dec 2010
Accepted: 24 Jun 2011
Published online: 14 Jan 2015 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article