Page 33 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.78, # 1, 2021, pp. 27-39

OPEN is the trade openness measured by the sum of exports plus imports as a share
of GDP. POP is country size, which proxies by population size. And ϵ and v are
error terms. The parameters β ,β ,β β represent the elasticities of
3
1
2
4
government size with respect to FDI, ODA, OPEN and POP, respectively. In
addition, the parameter α represents the elasticities of openness with respect to
1
POP. Model aims to detect the impact of both FDI inflows and ODA on government
size, considering openness and country size, as determinants of government size.
Dynamic Panel Data System
Model Two

In addition, we use the dynamic panel data GMM systems approach which estimates
the parameters from a system of equations. This method is important for the
dynamic panel data analysis, and it the first study, according our knowledge, in the
empirical works detecting the ODA and FDI impacts on government size, relating to
the subject and region.

 . = +  . − +  +  +

 +    
t

Equation 4
Where: Gov. St-1 is the lagged variable of the dependent variable. This lagged
independent variable is explanatory variable can strongly explain the dependent
variable. In this case, government expenditure, which determines the government
size, is in turn influenced by the government decision that is strongly determined by

previous decisions. µ represents the unobserved country specific effects, and t is
the standard error. DPD system takes into consideration the cross country
heterogeneity raise from pooled OLS estimation with cross sectional data. In
addition, DPD system analysis provides more coherent estimation compared to fixed
or random effect models, which addresses several biases related to heterogeneity
across countries and time, Mitze, & RWI, (2010).

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