Is there a link between government spending, good governance, and economic growth? Evidence from developing countries

This paper examines whether government spending and governance have a nonlinear relationship with economic growth. The study determines the threshold effect of the institutional quality on the relationship between public expenditure and economic performance for developing countries using the Dynamic Panel Threshold Kink Model (DPTKM) (Seo et al., 2019) from 1996 to 2020. This approach differs from other studies by analyzing the interplay of good governance under different regimes considering the double endogeneity of the threshold variables and the regressors. The results confirm that public spending favors growth only beyond a certain level for which the institutional quality is good.