Government size and automatic stabilizers: international and intranational evidence

This paper documents a strong negative correlation between government size and output volatility both for the OECD countries and across US states. This correlation is robust to the inclusion of a large set of controls as well as to alternative methods of detrending and estimation. In the international sample, a one percentage point increase in government spending relative to GDP reduces output volatility by eight basis points. Whereas in the US states the reduction in volatility is significantly larger ranging from 13 to 40 basis points.