Determinants of Per Capita Income Volatility Across Countries Focusing on the Stabilization Effect of Government Spending

Noh-Sun Kwark (Professor, Department of Economics, Sogang University)

  This study investigates the determinants of per capita income volatility across countries using the panel data composed of 148 countries from 1950 to 2009. In particular, the main focus of this paper is the effectiveness of fiscal policies in reducing the volatility. From the cross-country econometric analysis and the panel data analysis the empirical findings are documented as follows. (i) It is very consistently evident from almost all the specifications that the volatility of government spending and/or the volatility of the share of government spending to GDP are positively associated with the volatility of per capita income. The high share of government spending to GDP tends to lower the per capita income volatility. (ii) As the correlation coefficient between the business cycle components of government spending and those of per capita income is lower, the volatility of per capita income tend to be lower, which implies that the countercyclical government spending stabilizes per capita income. (iii) For many specifications the size of the GDP is negatively and the growth rate is positively related to the volatility. (iv) Openness tends to increase the volatility, and (v) the continent dummies, the exchange rate system, and the volatility of exchange rates are not very much related to the volatility.

JEL Classification Number: E32, E62

Keywords: Volatility, Government Spending, Multiplier, Stabilization Policy