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Keywords:

  • economic growth;
  • government size;
  • non-linear hypothesis;
  • public finance;
  • public spending;
  • threshold effects;
  • C23;
  • E62;
  • H50;
  • O50

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.