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Economic growth and government size in developed European countries: A panel threshold approach

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  • Hajamini, Mehdi
  • Falahi, Mohammad Ali

Abstract

Based on the literature on economic growth, there is a non-linear relationship between government size and economic growth, which is usually similar to an inverted U-shaped curve and is used to determine the optimum share of government expenditure. The present study aims to investigate the non-linear relationship among 14 developed European countries during 1995–2014. Final consumption expenditure to gross domestic product (FCE), current expenditure other than final consumption to gross domestic product (OCE), and government gross fixed capital formation to gross domestic product (GFCF) were considered for measuring government size. The results indicate an asymmetric effect of FCE and GFCF on economic growth when they are above and below the optimal level. The optimum values of FEC and GFCF were estimated to be 16.63 and 2.31%, respectively. However, it is noted that OCE always has a negative effect on economic growth. In terms of policy prescriptions, governments of developed countries should be aware that misallocation of public expenditure can occur given it may likely become unproductive after passing an optimal size.

Suggested Citation

  • Hajamini, Mehdi & Falahi, Mohammad Ali, 2018. "Economic growth and government size in developed European countries: A panel threshold approach," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 1-13.
  • Handle: RePEc:eee:ecanpo:v:58:y:2018:i:c:p:1-13
    DOI: 10.1016/j.eap.2017.12.002
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    More about this item

    Keywords

    Economic growth; Government expenditure; Government size; European countries;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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