Deciphering the non-linear nexus between government size and inflation in MENA countries: an application of dynamic-panel threshold model
subject: Dynamic panel threshold; Government size; Inflation rate; MENA; Nonlinear relationship
description: Contradictory to conventional economic theory, which foresees any increase in the size of government as inflationary, this article provides evidence that the reaction of price levels to changes in the size of government is nonlinear. The price levels do not necessarily increase in response to a rise in the size of the government but only up to a certain threshold or optimal level. Accordingly, this paper utilizes the dynamic panel threshold model to examine the threshold effects of government size (measured as government final consumption expenditure as a proportion of GDP) on inflation using a sample of 10 selected MENA countries from 1980 to 2019. The findings of this study stand out in several ways. First, the results support the nonlinear relationship between government size and inflation in the study area. Second, the government sizes estimated threshold level is equivalent to 12.46%. Third, government size negatively impacts inflation in the regime of small governments up to the threshold level. The impact turns positive once the government size goes beyond the threshold level in a regime of large size of government. These findings have ramifications for the conduct of fiscal policy. Policymakers in the MENA region can increase the size of government till it reaches the threshold level without exerting any upward pressure on price levels. The Author(s) 2024.
creator: Tariq A.; Amin A.; Ahmad M.
source: Journal of Economic Structures, Vol-13, No. 1
publisher: Springer Science and Business Media Deutschland GmbH
date: 2024-01-01
rights: All Open Access; Gold Open Access
relation: ISSN: 21932409
format: Online
language: English
type: Article
coverage: Tariq A., Department of Economics, Central University of Kashmir, Ganderbal, 191201, India, Department of Data Science, Christ University, Bengaluru, India; Amin A., Department of Economics, Central University of Kashmir, Ganderbal, 191201, India; Ahmad M., Department of Economics, Central University of Kashmir, Ganderbal, 191201, India