Is Government Spending an Important Factor in Economic Growth? Nonlinear Cubic Quantile Nexus from Eastern Europe and Central Asia (EECA)

Abstract

This study rigorously investigates the non-monotonic phenomenon of the government spending–growth nexus in the EECA. Using panel data from 19 countries over the period 1995–2019, a nonlinear quadratic estimator and cubic nonlinear estimator were applied to quantile regressions. The preliminary findings revealed a negative linear nexus of government spending and economic growth using a linear model, while the nonlinear models (i.e., quadratic and cubic nonlinear estimators) indicated evidence of nonlinearity in the nexus in the EECA over the study period. Furthermore, the study found strong evidence of the existence of an inverted “N-shaped” (nonlinear cubic) nexus between government spending and growth, which can be interpreted as the typical credit-driven boom-and-bust cycle in most EECA countries. Finally, in elucidating the nexus between government spending and economic growth, the study found that most macroeconomic and governance variables are relaxing in explaining GS.