Research Insights: What Is the Role of State Capacity in Dealing with Macroeconomic Volatility?
Peer Reviewed
Date issued
Aug 2023
Publication
Journal version
Subject
Economy;
Trade Openness;
Public Expenditure;
Macroeconomy;
Public Employment;
Public Sector;
Economic Development;
External Shock;
Wage;
Political Party;
Integration and Trade;
Gross Domestic Product
JEL code
D73 - Bureaucracy • Administrative Processes in Public Organizations • Corruption;
F19 - Trade: Other;
H11 - Structure, Scope, and Performance of Government;
O16 - Financial Markets • Saving and Capital Investment • Corporate Finance and Governance;
O19 - International Linkages to Development • Role of International Organizations;
P16 - Political Economy
Category
Catalogs and Brochures
Macroeconomic volatility can have serious implications for the economy; reducing a countrys exposure can increase long-term prosperity. When the government has significant capabilities, it is not necessary to isolate the economy using an inefficient technology: a large public sector that reduces the transmission of the shock in the economy. The effect of economic openness on government spending is mediated by the quality of government institutions. Countries must therefore invest in their capacities to face more effectively the challenges of external shocks. These capabilities are not developed overnight but instead result from continuous actions over time.
