Re-visiting the Armey Curve Hypothesis: An Empirical Evidence from India

Abstract

The present study aims to examine the relationship between government size and economic growth in India for the period from 1961 to 2018. Additionally, as a novel contribution, the current study also attempts to examine the existence of Armey curve and estimate the threshold level of government size in India. The empirical estimation uses time series analysis and employs quadratic ordinary least squares (OLS) function and autoregressive distributed lag (ARDL) bound testing approach to co-integration to examine the association between the variables. The result of the study confirms a long-run significant positive impact of government size on economic growth. The present study also finds the existence of Armey curve and supports the Armey curve hypothesis in India. There exists a positive impact of government size till the threshold level, and beyond the threshold level, the coefficient of economic growth tends to decrease. The estimated optimal government size is 11.89% for India; this shows that, currently, the government spends less than the optimum amount. It implies that India operates somewhere on the positive slope of the Armey curve, and there is a scope for the government to expand its size further. However, the findings of the study also suggest that a large size of the government can be harmful for the efficiency of economic growth; thus, adjusting the government at its optimum is crucial to the economy. JEL Classification: B23, C01, C87, H11, H50, O47

The role of government spending within the environmental Kuznets curve framework: evidence from G7 countries

“…When that level is exceeded, the increase in government spending starts to have a negative effect on growth. Following Armey ( 1995 ), a multitude of studies has been conducted to assess this non-linear approach in examining the relationship between the government size and economic growth (Vedder and Gallaway 1998 ; Gwartney et al 1998 ; Pevcin 2004 ; Chen and Lee 2005 ; Chobanov and Mladenova 2009 ; Abounoori and Nademi 2010 ; De Witte and Moesen 2010 ; Forte and Magazzino 2011 ; Altunc and Aydin 2013 ; Magazzino 2014 ; Hok et al 2014 ; Asimakopoulos and Karavias 2016 ; Chen et al 2017 ; Lazarus et al 2017 ; Rennane 2019 ; Nuredin 2019 ; Bozma et al 2019 ; Kim et al 2020 ; Jain et al 2021 ; Al-Abdulrazag 2021 ; Nouira and Kouni 2021 ; Isik et al 2022 ; Jain and Sinha 2022 ; Nikolova and Angelov 2022 ; Can and Aktas 2022 ). Most of these studies albeit conducted in many countries, with different methodologies, and over various sample periods share a common observation that there is a non-linear relationship between government size and economic growth.…”