This paper examines the nature of the relationship between government size and economic growth and identifies optimal level of government size through a novel and very general non-linear panel Generalized Method of Moments approach. Using a large panel dataset we uncover a statistically significant non-linear relationship via identifying the optimal threshold of government spending that maximizes growth. Furthermore, we show that the relationship between the two variables above and below that optimal level is statistically significant even if we split our sample to developed and developing countries. Finally, we find an asymmetric impact of government size on economic growth in developed and developing countries around the estimated threshold.
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Stylianos Asimakopoulos and Yiannis Karavias
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School of EconomicsUniversity of Nottingham
Nottingham, NG7 2RD
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