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THE EFFECT OF GOVERNMENT SPENDING ON ECONOMIC GROWTH: TESTING THE NON-LINEAR HYPOTHESIS

✍ Scribed by Tamoya Christie

Book ID
115214969
Publisher
John Wiley and Sons
Year
2012
Tongue
English
Weight
593 KB
Volume
66
Category
Article
ISSN
0307-3378

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✦ Synopsis

ABSTRACT

Theoretical models suggest a non‐linear relationship between government size and long‐run economic growth. However, testing this hypothesis empirically in cross‐country studies is complicated by the endogeneity of government spending and the accurate identification of inflexion points. This paper examines the non‐linear hypothesis by incorporating threshold analysis in a cross‐country growth regression. The methodology utilizes a sample‐splitting framework and follows an objective strategy for identifying and testing changes in the slope. The results provide evidence in support of the non‐linear hypothesis for a broad panel of countries.

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The purpose of this paper is to explore the effect of the elasticity of the tax structure on the amount of spending by state government. While the empirical analysis centers on state government spending, the underlying theory may be generalized to any government unit.