Abstract
This article intends to investigate the non-linear relationship between government spending and terms of trade volatility in the selected East Asian and Southeast Asian countries. According to the Rodrik's compensation hypothesis, government spending and trade shocks are positively correlated. On the other hand, conventional hypothesis contends that trade shocks and government spending are inversely related. Applying the Threshold Autoregressive Error Correction Model (TARECM) to annual time series data spanning the years 1980 through 2019 allows us to evaluate the veracity of these hypotheses. For six of the 9 countries we chose, we discover an asymmetric relationship between volatility in terms of trade and government spending. This suggests that the findings support the compensation hypothesis. However, for the other 3 countries, the association between terms of trade volatility and government spending seems to be in line with conventional theory. JEL Classification: C23; C33; F15; H5; H11 Keywords: Government spending, Terms of trade Volatility, Asymmetric relationship, TARECM, East Asian and Southeast Asian countries.
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