Government Size And The International Mobility Of Capital

Abstract

This paper examines how government size impacts on the degree of capital mobility among 23 industrial countries by estimating saving-investment correlations using an error-correction model, with random coefficients, from data for the 1970-2006 period. The error-correction approach allows us to integrate both short-run and long-run behaviour within a single model. This is important if the model is to be given a capital mobility interpretation, because the saving-investment correlation relevant for assessing capital mobility is a long run one. Further, a model with random coefficients is a more general way of incorporating unmeasured differences between countries. Our sample is classified into five groups according to government size, which is measured by the ratio of government expenditures to GDP, and the model is estimated for each group separately using the random coefficients estimator. Our results find some support for the view that countries with larger governments also have lower capital mobility.