Economic growth and the optimum size of government in 15 European countries: A threshold panel approach

In the growth literature, there is a nonlinear relationship between economic growth and government size, which is similar to an inverted U-shaped curve. This curve can be used to determine the optimum share of government expenditures. This paper, using threshold panel approach, attempts to investigate this nonlinear effect for 15 European countries, empirically. For the size of government, four measures are considered as follows: (i) total expenditures to gross domestic product, (ii) final consumption expenditures to gross domestic product, (iii) current expenditures other than final consumption to gross domestic product and (iv) government gross fixed capital formation to gross domestic product. Estimation results show that the inverted U-shaped curve is approved for four measures. The estimated optimum shares are 41.7%, 15.8%, 19.4% and 2.5%, respectively.