The Relationship between Government Size, Economic Volatility, and Institutional Quality: Empirical Evidence from Open Economies

The size of the government is one of the most fundamental debates of open economies. In any economy, government plays an important role, but a pertinent level of economic prosperity has never been obtained in history without government. Therefore, the objective of this paper investigates the association of government size, economic volatility, and institutional quality for 182 economies from the time period 1996-2016 is collected from the World Bank database. GE is defined as the General government’s final consumption expenditure. Health expenditure is represented by HE. Government expenditure on education is denoted by EDUEXP. The economic volatility is measured by the rolling standard deviation of GDP per capita growth rate, Population growth, Trade openness, GINI represented Gini index which measures the degree to which the income distributed or consumption expenses among citizens deviates from a perfectly equal distribution. The results proposed that economic volatility has a significant effect on government size and institutional qualities. Moreover, the paper extends the investigation by finding the link between economic volatility with government health and education expenditure separately. The policy implication drawn from this analysis is that controlling economic volatility may reduce the size of government and also significantly affect health and education expenditures.