Modeling the Asymmetric Effects of Government Size on Iran’s Economic Growth: A Threshold Approach

The primary objective of this study is to examine how government expenditure shocks affect economic growth in Iran. To this end, a multifaceted modeling approach based on Ram’s (1986) growth framework and Hansen’s threshold regression method is employed. Two indicators are used to measure government size: the ratio of current government expenditures to GDP (GS1) and the ratio of government capital asset acquisition expenditures to GDP (GS2). The results indicate that shocks in government capital expenditures have a significant positive impact on Iran’s economic growth, whereas such effects are not observed for current government expenditures. Additionally, the findings suggest that the Barro-Armey curve has not materialized in Iran during the period 1961–2023; in other words, at none of the small, medium, or large government sizes does the relationship between government size and economic growth become negative, and an inverted U-shaped curve is not observed. Although a decline in efficiency and effectiveness is noted at larger government scales, the relationship remains positive. Another key finding is that government spending—both current and capital—has positive spillover effects on private sector output. For current expenditures, these effects diminish as government size increases (decreasing elasticity), whereas for capital expenditures, the spillover effects are strengthened with larger government size (increasing elasticity).