The Analysis of Visible Hand of Government: The Threshold Effect of Government Spending on Economic Growth

Abstract

In this study, the role of government expenditures threshold value in the relationship between government spending and economic growth has been investigated for Turkish economy in period 1998:Q2-2015:Q2. At the first stage, government expenditures threshold value has been detected and after that government spending-economic growth relation has been examined using threshold autoregressive (TAR) model. The finding of this study is that, under the first regime which is below the threshold level, low government spending has significantly negative impact on economic growth. On the other hand, under the second regime which is above the threshold level, government spending has significantly positive effect on economic growth. This finding shows that rising government spending is an important factor to faster the economic growth process. Due to this effect, Turkey should follow a determined strategy to raise spending level above threshold value. Besides, the result of the study emphasizes that politicians and decision makers must take into account for this effect. Index Terms-Economic growth, government expenditure, nonlinearity, threshold autoregressive model.