Country size and business cycle volatility: Scale really matters

Abstract

In a recent study Andrew Rose found that country size does not matter for several economic outcomes [Rose, A.K., 2006. Size really doesn't matter: In search of a national scale effect. J. Japanese Int. Economies 4, 482–507]. However, he did not consider the effect that country size may have on business-cycle volatility. To investigate the empirical relationship between business cycle volatility and country size, we use a panel data set that includes 167 countries from 1960 to 2000. The results suggest very strongly that the relationship between country size and business cycle volatility is negative and statistically significant. This implies that smaller countries are subject to more volatile business cycles than larger countries. This holds both in a simple bivariate model and when we include Rose's control variables and openness. Moreover, the results are robust to different sample periods and several detrending methods. It follows that country size really matters, at least in terms of cyclical fluctuations.