The study examines whether the growth effect of government spending is contingent on the level of institutional environment prevalent in Economic Community of West African States (ECOWAS).
The study adopts the more refined and more appropriate dynamic threshold panel by Seo and Shin (2016) and made applicable be Seo et al. (2019). The technique models a nonlinear asymmetric dynamics and cross-sectional heterogeneity simultaneously in a dynamic threshold panel data framework.
The results show that there is a threshold effect in the government spending-growth relationship. Specifically, the authors found that the impact of government spending on economic growth is positive and statistically significant only above a certain threshold level of institutional development. Below that threshold, the effect of government spending on growth is insignificant and negative at best. The findings suggest that government spending-growth nexus is contingent on the level of Institutional quality.
Unlike previous studies that adopt the linear interaction model which pre-impose a priori conditional restrictions, this study adopts the dynamic threshold panel framework which allows the lagged dependent variable and endogenous covariates.
