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

Authors

  • Tamoya Christie

    Corresponding author
    1. Department of Economics, University of the West Indies, Kingston, Jamaica
    • Correspondence: Tamoya Christie, Department of Economics, University of the West Indies, Kingston 7, Jamaica. Tel: +1-876-896-2199; Fax: +1-876-977-1483; Email: tamoya.christie@uwimona.edu.jm.

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  • The author is grateful to Jenny Ligthart and Neven Valev for insightful comments. I also wish to thank the participants of the 5th International Social Science Research Conference for helpful suggestions on a previous version.

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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