Big Government Is No Guarantee of Milder Recession, BIS Says
Countries with a large government role in the economy don’t do significantly better in avoiding deep recessions than those with smaller public sectors, the Bank for International Settlements said.
While data from the latest recession suggest government spending helps stabilize economies, the effect seems to have weakened since the mid-1980s, according to the study published in the Basel, Switzerland-based BIS’s quarterly report. Openness to trade and monetary policy may be gaining in importance, the study said.
“Government size does not appear to reduce the depth of recessions,” authors Madhusudan Mohanty and Fabrizio Zampolli wrote.
The research was prompted by debate after the global financial crisis and recession about “the link between government size and output volatility,” according to the BIS. The study looked at data since 1970 from countries in the Organization for Economic Cooperation and Development.
While countries with “larger governments” such as Denmark and Norway had a smaller average loss of output over time, some with large governments, such as Sweden, have had more severe recessions, the study said.
Recessions have become “considerably longer” in the past 25 years and government spending to counter declining growth may deepen the boom-and-bust cycle, according to the BIS, which acts as a clearinghouse between central banks.