Nonlinear threshold approach for asymmetric effects of government size on economic growth in an emerging Asian economy: the Malaysian experience

This paper discovers the asymmetric relation between government size and economic growth in Malaysia, an emerging Asian economy, by utilising a dynamic threshold nonlinear approach. The study finds empiric evidence that the threshold effect linking government size to economic growth in Malaysia exists when two different proxies of government size are set as the threshold variable. On closer inspection, it is found that an inverted U-shaped Armey curve is present when allowing for endogenous government size threshold proxied by government operating/real GDP. However, a U-shaped curve of nonlinear relationship exists instead when the government investment/real GDP serves as the threshold variable. In general, this paper gives policymakers a real insight into the optimal government size in Malaysia especially when designing an effectual fiscal policy to advance sustainable economic growth to materialise its Shared Prosperity Vision by the year 2030.