New insights into the growth-maximizing size of government: evidence and implications for Turkey

Abstract

This study provides new insights into the growth-maximizing size of government. Unlike the previous literature, which traditionally uses a single measure, government expenditure as a share of GDP, to measure the size of government, in this study we use multiple measures to measure it. Considering each of these measures, we first attempt to uncover the potential nonlinear relationship between government size and growth, and we then estimate the thresholds of government size that maximize growth. To this end, we use an appropriate econometric specification, namely the threshold autoregressive (TAR) model proposed by Hansen [1996Hansen [ , 2000, and apply it to Turkey's annual time-series data covering a fairly broad period ranging from 1974 to 2019. Overall, we arrive at the following key result: the size of government is not linearly correlated with growth, confirming the existence of a growth-maximizing threshold for each measure of government size, beyond which growth tends to slow down as government size continues to increase. More specifically, the results show that the range of estimated growth-maximizing size of government is between 4.28% and 15.19%, depending on how government size is defined or measured. Policymakers can take these different thresholds into account when designing their policies.