Citation:
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 7 [Issue:] 2013-38 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2013 [Pages:] 1-56
Abstract:
In this paper, we employ a portfolio approach based on a two-country world to study the impact of financial openness on the size of government and on other key economic variables, including the consumption-wealth ratio, the growth rate of wealth, and welfare (assuming that public spending is utility enhancing). The model suggests that the size of government, the consumption-wealth ratio, and welfare should be greater in an open economy because of higher productivity and/or less volatility because of risk sharing. The theoretical results for the growth rate depend on differences in productivity and in consumption-wealth ratios. The empirical evidence - based on a sample of 49 countries from 1970 to 2009-broadly supports the main theoretical results of the model.