Estimating the impact of government consumption on growth: Growth accounting and endogenous growth models

Panel data is analyzed on government consumption and GDP growth in 116 countries, 1950–90. The purported positive impact of government growth on GDP growth is due to simultaneity bias. The negative cross-national correlation between government size and economic growth reflects in part an equilibrium relationship. Growth is a non-monotonic function of government size (measured at current domestic prices). Growth rates are increasing in government consumption expenditures up to a level around 12 percent of GDP.