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The Optimal Magnitude of Government Spending: Evidence from Cambodia

The Optimal Magnitude of Government Spending: Evidence from Cambodia Scholars and policymakers have vigorously debated what the impact of government spending on economic growth is. Some current research and theoretical models suggest that the reaction of economic growth to the extension of government spending can be either positive or negative. This article intends to investigate the inverted-U shaped relationship between output growth and government spending (i.e., government fixed capital formation [GFCF] and government final consumption expenditure [GFCE]). Ordinary least squares (OLS) is employed as an approach to annual data for Cambodia obtained from 1971 to 2015. The result reveals that GFCF and GFCE have an inverted-U shaped relation with economic growth and that 5.40% and 7.23% are the optimal values of GFCF and GFCE, respectively. The labour growth rate and export growth rate contribute positively to the growth rate of output. This study indicates that the increasing level of government expenditure reduces the efficacy of government spending, and also helps Cambodia’s policymakers to control fiscal policy more efficiently.JEL Classification: C80, E62, H50, O40 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South Asian Journal of Macroeconomics and Public Finance SAGE

The Optimal Magnitude of Government Spending: Evidence from Cambodia

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Publisher
SAGE
Copyright
© 2022 The Author(s)
ISSN
2277-9787
eISSN
2321-0273
DOI
10.1177/22779787221093116
Publisher site
See Article on Publisher Site

Abstract

Scholars and policymakers have vigorously debated what the impact of government spending on economic growth is. Some current research and theoretical models suggest that the reaction of economic growth to the extension of government spending can be either positive or negative. This article intends to investigate the inverted-U shaped relationship between output growth and government spending (i.e., government fixed capital formation [GFCF] and government final consumption expenditure [GFCE]). Ordinary least squares (OLS) is employed as an approach to annual data for Cambodia obtained from 1971 to 2015. The result reveals that GFCF and GFCE have an inverted-U shaped relation with economic growth and that 5.40% and 7.23% are the optimal values of GFCF and GFCE, respectively. The labour growth rate and export growth rate contribute positively to the growth rate of output. This study indicates that the increasing level of government expenditure reduces the efficacy of government spending, and also helps Cambodia’s policymakers to control fiscal policy more efficiently.JEL Classification: C80, E62, H50, O40

Journal

South Asian Journal of Macroeconomics and Public Finance – SAGE

Published: Jun 1, 2023

Keywords: Economic growth; government investment; government consumption; OLS; Cambodia

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