Public Sector Governance, Economic Stability and Mediating Role of Public Size for World Economies

Abstract

While investigating existing empirical literature, the relationship between public sector
governance and economic stability is found inconclusive. Theoretical argument
suggests that the effective public sector governance improves macroeconomic
instability. However, the literature provides positive, negative and insignificant
relationship between the both. In light of the aforementioned, this study aims to
explore the mediating effect of public size in the relationship between governance and
stability. The researchers utilized a panel data set of 102 developed and developing
countries from 1996 to 2021 for estimation, and applied Biørn (2014)'s recommended
one-way random effect estimator for the SUR system. The results demonstrate that, in
developed economies, public sector size serves as a route via which public sector
governance effectively enhances macroeconomic stability, however in the case of
developing economies the role of the channel of public size is quite opposite and
relationship is negative. Moreover, public size contributes positively in maximizing the
macroeconomic stability for developed economies and the results demonstrate that
well managed and smaller public size mediates the governance-stability association. It
is concluded that public sector governance enhances macroeconomic stability both
directly and indirectly by means of the public size channel.