Government Size and Intersectoral Income Fluctuation: Panel Analysis

There has been an extensive empirical literature on the stabilization effect of government spending on income; no existing paper has examined the interaction between economic uncertainty and government size as the stabilization effort of a government. This paper addresses this issue within a Keynesian framework utilizing the inter sectorial income fluctuations as a new measure of economic uncertainty. Our empirical model allows for the interaction of government size and uncertainty through panel data for 11 Asian countries during 1985–2005 periods. Taking into account the interaction in accordance with these simple models, we obtained the following main result. As Rodrik (1998) hypothesized, this study finds that an economy with high inter sectorial income fluctuations will have a large government, but at the same time, the size of government has a substantial efnfect on the stabilization of inter sectorial income fluctuations. Furthermore instruments & dummy variable is introduced into the model for 3SLS method.