DefinePK

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.