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Size Of Government And Economic Growth: A Nonlinear Analysis

  • Shanaka Herath

The new growth theory establishes, among other things, that government expenditure can manipulate the economic growth of a country. This study attempts to explain whether government expenditure increases or decreases economic growth in the context of Sri Lanka. Results obtained employing a productive output series and applying an analytical framework based on second degree polynomial regression are generally consistent with previous findings: government expenditure and economic growth are positively correlated; excessive government expenditure is negatively correlated with economic growth; and investment promotes growth. In a separate section, the article examines Armey’s idea of a quadratic curve that explains the level of government expenditure in an economy and the corresponding level of economic growth [Armey, D. (1995). The Freedom Revolution. Washington, D.C.: Regnery Publishing Co.]. The findings confirm the possibility of constructing the Armey curve for Sri Lanka, and it estimates the optimal level of government expenditure to be approximately 27%. This article adds to the literature indicating that the Armey curve is a reality not only for developed economies, but also for developing economies.

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Article provided by Faculty of Economics, University of Belgrade in its journal Economic Annals.

Volume (Year): 57 (2012)
Issue (Month): 194 (July - September)
Pages: 7-30

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Handle: RePEc:beo:journl:v:57:y:2012:i:194:p:7-30
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