Country size, economic performance and volatility

Abstract

What are the relationships between country size, economic growth and business cycle volatility? To investigate this question, we developed an original country-size index with principal component analysis. Traditional analysis usually equates country size with population. Our methodology enables to simultaneously consider several factors constitutive of country size: population, GDP and arable land. These additional variables allow us to capture different components of the country size and to control for more than a demographic effect. Using a panel data set of 163 countries for 1960–2007, we find, contrary to Rose (2006), that country size has a significant and negative correlation with economic performance. Our results for output volatility extend the negative and significant relationship found by Furceri and Karras (2007). In addition, we present differentiated results for small and large countries, OECD members, eurozone countries and the so-called BRIC countries.JEL Codes: E42; F36; F42.

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