Optimal government size and economic growth in developing and MENA countries: A dynamic panel threshold analysis

ABSTRACT The research for this paper was conducted in order to investigate the optimal size of government as well as its effect on economic growth in selected MENA and developing countries over the period from 1988 to 2016. The results reveal that there is a government expenditure threshold effect on economic growth for all panel groups. Indeed, in accordance with an important body of recent literature, the threshold is between 10% and 30% for the whole sample, between 20% and 30% for MENA countries and between 10% and 20% for developing countries. The results obtained from the CS-ARDL model, recently developed by Chudik et al. (2017. Is There a Debt-threshold Effect on Output Growth? Review of Economics and Statistics, 99(1), 135–150. doi:10.1162/REST_a_00593), also showed that the relationship between government expenditure and economic growth is non-linear. Hence, we have found evidence of an inverted U shaped relationship between government expenditure and economic growth.