What are the effects of country size on growth and business cycle volatility?
To investigate this question, previously asked by Rose (2006) and Furceri and Karras
(2007), we developed an original country-size index with principal component
analysis (PCA). Traditional analysis of this topic usually only includes the population.
Our methodology enables us to simultaneously consider the countries’ population,
GDP and arable land. The inclusion of these additional variables allows
us to analyse different components of country size and to control for more than a
merely demographic effect. Using a panel data set of 163 countries for 1960–2007,
we find, contrary to Rose (2006), that country size has a significant and negative
impact on economic performance. Our results for output volatility extend the negative
and significant relationship found by Furceri and Karras (2007). In addition,
we present differentiated results for small and large countries, OECD members,
eurozone countries and the so-called BRIC countries. These results are robust for
different country and time samples and several control sets.