An Investigation of the Impact of Size of the Government on Economic Growth: Some New Evidence from OECD-NEA Countries

Abstract

Abstract Achieving economic growth, as one of the essential purposes in each country, needs appropriate tracing of government as one of the important and effective sections in that economy. Nowadays, unlike the 80s, economists concentrate on objectives such as explanation of the relationship between size of the government and economic growth and delineation of optimum size of the government which causes maximum level of economic growth. But, notwithstanding widespread studies had not caught the unique result about of this theme. This paper is conducted with the purpose of examining the impact of size of the government on economic growth in selected OECD-NEA countries over the period of 1990-2011 and uses the Panel Smooth Transition Regression (PSTR) model in the form of Cobb– Douglas equation function as it is applied in Dar and Amir Khalkhali (2002) to remove the existent problems in previous studies and offering reliable results in frame of comprehensive and integral model. The results of the study strongly reject the linearity hypothesis and estimate two regimes that give a threshold in size of the government of 28.27 percent to gross domestic production (GDP) for selected countries. Moreover, the impact of size of the government on economic growth is positive for both regimes. But, the intensity of it is low in high levels of size of the government. So, the results of this study express that the big govenment size is as a brake for high levels of economic growth in selected countries under investigation. Also, the impacts of investment, labor force, and export on economic growth have been evaluated as positive in two regimes of the non-linear model.