Effects of Trade and Financial Liberalizations on the Government Size: The Case of Iran

This paper tries to analyze effects of trade and financial liberalizations on the Iran’s government size during both long-run and short- run. Accordingly, a specification of the auto regression with distributed lag (ARDL) has been used for investigating the long run relationships between variables, and a vector correction model (VECM) has examined dynamically the short-run relationships between the government size and the explanatory variables. The time series data rely on the period 1959-2007.   The empirical results have indicated that a rise in foreign direct investment (FDI), as a proxy for financial liberalization, and trade openness lead to a decrease in Iran’s government size, while the long-run effect of an increase in FDI is more pronounced than that of the short-run.JEL Classification: E22, F11, F13, GÂ