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

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.