The Nexus between Economic Growth and Public Spending in Eastern European Countries

Abstract

In this study we will analyze the relationship between governmental expenditure and economic growth rate for 8 Eastern-European countries using data between 1995-2014. The main goal of the present study is to test whether there is or there is not an inversed U-curve type relationship between public spending and economic growth as well as to find an optimal level of public spending which maximizes economic growth. The econometric method used in this study is the ARDL model, while the empirical observations show that the present weight of public spending within the GDP exceeds the optimal level calculated for the three countries for which the Armey-type phenomenon occurs. Based on the study results, a proposal for an economic policy could be the fact that the weight of public expenditure should be reduced while the efficiency of public spending programs should be increased.DOI: http://dx.doi.org/10.5755/j01.ee.28.2.7734