The Journal of Economic Asymmetries 22 (2020) e00180

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The Journal of Economic Asymmetries

journal homepage: www.elsevier.com/locate/jeca

Government spending and economic growth in ECOWAS: An

asymmetric analysis
Olumide O. Olaoye a, b, *, Oluwatosin O. Eluwole a, Aziz Ayesha c,
Olugbenga O. Afolabi a
a
Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria
b
Honorary Research Associate, ILMA University, Karachi, Pakistan
c
Department of Business Administration, ILMA University, Karachi, Pakistan

A R T I C L E I N F O A B S T R A C T

Keywords: This study examines the asymmetry phenomenon in government spending-growth nexus in
Government spending ECOWAS.
Economic growth The study adopts the System Generalized Method of Moment within the framework of panel
Shocks
data analysis as proposed by (Arellano & Bover, 1995; Blundell & Bond, 1998) which addresses
Structural break
Driscoll-Kraay standard errors
the issue of potential endogeneity of fiscal variables through the use of internal instruments, and
Kink follow in the footsteps of Hatemi-J (2011, 2012), Granger and Yoon (2002) to separate negative
shocks from positive shocks to government spending. In addition, we adopt Driscoll and Kraay’s
nonparametric covariance matrix estimator, to account for cross-section dependency and cross-
country heterogeneity inherent in empirical modelling.
Our findings reveal that there is evidence of asymmetry in the government spending-economic
growth nexus in ECOWAS over the period of study. We find that the response of economic growth
to government spending shocks differs according to the nature of shocks on them. More specif-
ically, the cumulative effect of expansionary government spending shocks on economic growth is
positive and statistically significant. While the cumulative effect of a contractionary government
spending exerts a negative and statistically significant impact on economic growth. Also, we found
strong evidence of the existence of an inverted “U-shaped” relationship between government
spending and economic growth.

1. Introduction

There is increasing evidence that the relationship between government expenditure and economic growth may not be linear. To this
end, a large volume of literature have examined the possibility of a non-linear relationship between government spending and economic
growth and have documented evidence (Kim et al., 2018; Forte & Magazzino, 2011, 2016; Asimakopoulos & Karavias, 2016; Dalena &
Magazzino, 2012; Magazzino, 2013, 2014; Çulha, 2017; Hung & Lee, 2010; Makin, 2013; G
omez-Puig & Sosvilla-Rivero, 2017;
Alwagdani, 2014; Gali & Perotti; 2003; Atems, 2019). Specifically, several scholars have found possible inconsistencies with the
standard linear model, indicating the necessity of nonlinear estimation techniques (Galor & Weil, 2000; Hansen, 2000; Larsen, 2016;

* Corresponding author. Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.

E-mail addresses: oluweds34@gmail.com (O.O. Olaoye), eluwole.odunayo@gmail.com (O.O. Eluwole), ayesha.aziz@ilmauniversity.edu.pk
(A. Ayesha), tunjiga2000@gmail.com (O.O. Afolabi).

https://doi.org/10.1016/j.jeca.2020.e00180
Received 21 November 2019; Received in revised form 19 July 2020; Accepted 12 August 2020
1703-4949/© 2020 Elsevier B.V. All rights reserved.
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

Odell, 2009, 2012). By relaxing the linearity assumption, these papers found models that are more efficient at modelling economic
growth. A major consequence of nonlinearities in light of the Solow Growth Model is that the assumption of conditional convergence is
violated by the presence of multiple steady states. Specifically, the existence of multiple steady-state levels means that the efficacy of
government fiscal operations might be dependent on other macroeconomic or institutional factors (Larsen, 2016).
Several reasons have been adduced for this nonlinear-relationship between government expenditure and economic growth. One, as
earlier mentioned, the relationship may be dependent on other macroeconomic factors. For example, the relationship may be impacted
by macroeconomic shocks or structural breaks. Similarly, the relation between the two macroeconomic variables may be dependent on
institutional conditions like institutional infrastructure (Olaoye & Aderajo, 2020; Olaoye et al., 2019, 2020; Kim et al., 2018). Second,
several scholars posit that there is a valid tipping point (i.e. threshold) beyond which government spending will lead to slower economic
growth (Forte & Magazzino, 2011, 2016; Dalena & Magazzino, 2012; Magazzino, 2013, 2014 Hajamini & Falahi, 2018; Karras, 1997;
Chen & Lee, 2005; Chiou-Wei et al., 2010; Gunlap & Dincer, 2010; Altunc & Aydin, 2013; Vedder & Gallaway, 1998; Sheehey, 1993).
These studies support an inverted U-shaped curve relationship between government spending and economic growth, herein referred to
as the BARS curve after (Barro, 1990; Armey, 1995; Rahn & Fox, 1996; Scully, 1995). Third, there is potential asymmetric information in
the government expenditure-growth nexus (Hung & Lee, 2010; Paleologou, 2013), especially, in developing countries where we have
weak institutional framework, rigid structures, bureaucracy, lack of transparency and weak governance. That is, in developing countries,
where the quality of institutional infrastructure is low, there is no perfect (adequate) information to the citizenry about government
fiscal operations (such as total revenue, and actual government spending). Similarly, government spending shows asymmetric structure
in their trend (see Fig. 1). Fourth, business cycle indicators, such as government spending, often exhibit asymmetric behaviour (via
automatic fiscal stabilizers and/or discretionary fiscal measures) (Combes et al., 2017; Enders & Siklos, 2001). This implies that eco-
nomic cycle asymmetries could transmit into government spending (Chen, 2014).
In the same way, a plethora of studies has examined the non-linear relationship between government spending and economic growth
using various techniques. For example, some scholars have examined the non-linear relationship by merely adopting a dummy variable
technique to test the presence of asymmetric structure of government spending (Hung & Lee, 2010; G
omez-Puig & Sosvilla-Rivero,
2017). This is limited, in that, it cannot adequately capture the non-linear effect (Olaniyi, 2019). A small number of empirical
studies have examined the asymmetric structure of government expenditure by examining the responsiveness of government spending
to business/economic cycle (see Çulha, 2017; Mercinger et al., 2017). Likewise, a few studies have examined the non-linearities in the
government spending-economic growth nexus by the simple inclusion of a squared government spending term or by the inclusion of a
cubic government spending term (Ghosh, Kim, Mendoza, Ostry, & Qureshi, 2013; B€ okemeier & Stoian, 2018; IMF, 2003). Other
methods applied in extant studies include the threshold autoregressive and data envelopment analysis for calculating the optimum size
of government (Asimakopoulos & Karavias, 2016; Barro, 1991; Chiou-Wei et al., 2010; Christie, 2014; Nirola & Sahu, 2019; Ram, 1986;
Vedder & Gallaway, 1998). These techniques have some major drawbacks. For example, the quadratic form produces biased estimates
due to its non-stochastic nature. In addition, the estimates cannot be easily validated using the usual diagnostic tools. Similarly, in the
quadratic form model, the optimal size cannot be directly estimated (Hajamini & Falahi, 2018).
Likewise, previous works have examined the non-linear relationship by pooling both industrialised and developing countries from
different regions in the same sample (Çulha, 2017; Mercinger et al., 2017). This has some major shortcomings. One, by grouping
together countries that are at different stages of economic growth and development, it fails to address the region-specific effect, and the
potential biases induced by the existence of heterogeneity across regions. This may lead to inconsistent and misleading Results
(Ghirmay, 2004; Odhiambo, 2008, 2009). It has been suggested that it is better to examine the non-linear relationship in a
country-specific study or in a sample of relatively similar developing countries and not mix the two (Temple, 2000).
Against this backdrop, this study contributes to the extant literature in four distinctive ways. One, this study examines the non-linear
relation between government spending and economic growth by following the footsteps of Hatemi-J (2011, 2012), Granger and Yoon
(2002), Olaniyi (2019), Olayeni (2012) to separate positive shocks from negative shocks, and following Kandil (2001) to separate
positive shocks (expansionary) from negative shocks (contractionary) in government spending. The reason for this is obvious. First,
Total Government Spending [Billion US dollars]

Fig. 1. Trend of average government spending in ECOWAS

2
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

unlike the traditional methods of modelling asymmetry, this method allows us to adequately model nonlinearities in the government
spending-expenditure growth nexus. Similarly, this method allows us to model shocks and show how the responses of economic growth
to government expenditure differ according to the nature of shocks on them. Two, we adopt the System Generalized Method of Moment
within the framework of panel data analysis as proposed by (Arellano & Bover, 1995; Blundell & Bond, 1998). This method combines
the regression in differences with the regression in levels in a system in which the two equations are instrumented separately. Our choice
is informed by the fact that, the framework is robust to issues of magnifying gaps associated with unbalanced panels (Roodman, 2009a).
Second, it takes care of country-specific effects. Third and most notably, it addresses the issue of potential endogeneity of fiscal variables
through the use of internal instruments (i.e. instruments based on lagged values of those variables) (Arellano & Bond, 1991; Atsuyoshi &
Francisco, 2014; Blundell & Bond, 1998; Holtz-Eakin et al., 1988).
Further, unlike previous studies which assume that the disturbances of a panel model are cross-sectionally independent, we account
for cross-section dependency and cross-country heterogeneity inherent in empirical modelling. To do this, we adopt the Driscoll and
Kraay’s nonparametric covariance matrix estimator, adjusted for use with both balanced and unbalanced panels along with Monte Carlo
simulations (Hoechle, 2007). This is because the issue of cross-sectional dependence can arise when a shock to one country is trans-
mitted to other countries through bloc through macroeconomic interdependence or through contagion (Beck et al., 2011; Bouvet et al.,
2013).
Lastly, to examine the threshold effect of government spending on economic growth, the study employs the dynamic panel data with
threshold effect and endogeneity developed by Seo and Shin (2016) and made applicable by Seo et al. (2019). A major advantage of the
dynamic panel threshold model is that it is appropriate for empirical applications where the threshold effect focuses on one variable and
there is no reason to expect a discontinuous regression response at the threshold. More importantly, the dynamic panel threshold model
produces a robust inference regardless of whether the model has a kink (false threshold) or a jump since the asymptotic normality holds
true irrespective of whether the regression function is continuous or not (Seo & Shin, 2014). This was also affirmed by Seo and Shin
(2016). As a consequence, in our dynamic panel threshold model, we do not need a prior knowledge on the continuity of the model to
make inference for the threshold model. Finally, this method avoids the sample selection bias problem associated with an arbitrary
sample-splitting or the dummy variable approach of previous methods (Seo & Shin, 2014).To our knowledge, none of the studies in the
literature has applied this method to examine the threshold in the government expenditure-economic growth nexus.
Our study may have important practical policy implications, especially for developing countries, where capacity utilization and
unemployment are critical issues, which has led to the re-examination of the role of government and private sector participation in
economic growth and development in developing countries. For instance, the stabilizing effects of alternative government spending
shocks might be dependent on the state of the economy (Kandil, 2001). As Kandil (2001) affirms, that if the economy is near
full-equilibrium capacity utilization, expansionary government spending shocks increases interest rate significantly (such that gov-
ernment spending substitutes directly for private consumption) which crowds out private investment. In contrast, when the economy is
below full capacity utilization level, expansionary government spending shocks are likely to be effective in stimulating aggregate de-
mand without a significant increase in the interest rate. The reduction in the cost of borrowing moderates the anticipated increase in
future tax liability required to finance the increase in government expenditure. Thus, the negative effect of an increase in government
spending on private consumption is likely to become moderate below full-equilibrium (Kandil, 2001). Lastly, the threshold effect of
government spending on economic growth suggests that there is a valid tipping point beyond which the positive effect of government
spending on economic growth starts to decline and ultimately, becomes negative.
One economic implication of this is that, given the negative effect on private spending, following expansionary government spending
shocks, governments might need to reconsider the decision to increase government spending when the economy is near full-equilibrium
capacity utilization. Two, following the Keynesian hypothesis, the threshold effect of government spending on economic growth is an
indication that the standard crowding-out effect might be operating in ECOWAS. That is, there is a negative effect of increasing gov-
ernment expenditure on private consumption and investment via an increase in the real interest rate. Another economic implication of
our study is that by assuming a symmetric relationship between government spending and economic growth, existing studies might have
suffered from model misspecification, which may likely result in fiscal policy misdirection in developing countries and ECOWAS, in
particular.
The rest of the paper is structured as follows. Section 2 details the methodology and data sources; Section 3 presents the Results; and
Section 4 discusses the conclusions and implications for policy.

1.1. Data and methodology

The data are taken from the world development indicators (World Development Indicators, 2018) and covers the period 2005–2017.
Annual data on general government expenditure (GOV) and economic growth (RGDP), for Benin, Burkina Faso, The Gambia, Cape
Verde, Guinea, Guinea-Bissau, Ivory Coast, Ghana, Liberia, Nigeria, Senegal, Niger, Mali, Sierra Leone and Togo, are used in this study.
We adopt an unbalanced panel of all the 15 ECOWAS countries. Similarly, our dataset consists of yearly indices for government
expenditure and real GDP. We used GDP (US $ at current prices) deflated by the GDP deflator to get the real GDP. We measure the size of
government expenditure by general government final consumption expenditure in current US dollars. Consumption spending is proxied
by final consumption expenditure in current US dollars. We transformed all the series into logarithmic form. This logarithmic trans-
formation has been suggested as a way of mitigating the difference in variables across country and thereby reducing heteroskedasticity.
lnGOVt is the natural log of government expenditure, lnRGDPt is for natural log of real GDP, lnGCF is the natural log of gross capital
formation and lnFDI is the natural log of foreign direct investment.

3
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

2. Descriptive statistics

Table 1 panel A shows the result of the descriptive statistics of the main variables in our model. This reveals the characteristics of the
variables using mean, median, minimum, maximum values, as well as the distribution behaviour of the data using Kurtosis and
Skewness statistic. As shown in Table 1 panel A, the mean and median are within the maximum and minimumvalues, indicating that the
data exhibits high accuracy. Similarly, the degree of deviations from the mean as captured by the standard deviation shows that the
series are stable. The estimated values for the various series show the series employed do not have a normal distribution. A series is
normally distributed if it is characterised by zero skewness and kurtosis of 3. This, however, does not affect the reliability of the Results
obtained in statistical analysis because, for a large sample, a violation of the normality assumption is unimportant. In reference to the
central limit theorem, the test statistic will asymptotically follow the appropriate distribution even in the absence of normality.

2.1. Model specification

In this study, we apply the endogenous growth theory of Barro (1990). Barro introduced government expenditure as a public good
into the Cobb- Douglas production function. Therefore, this study, following Loizidies and Vamvoukas (2005), Kooray (2009) and
Afonso and Jalles (2011), modelled the production function as an interaction between the stock of physical capital K and total public
spending G.

Yit ¼ Kitα Gβit ðAit Lit Þ1αβ 1

where Y denotes real gross domestic product (GDP) per capita, G is government expenditure, K is the stock of available capital, L is
labour (human capital resources), is the labour augmenting factor reflecting the efficiency of labour in country i at time t, subscript i and
t are the country and time index.
in line with the theoretical growth literature, in the steady state, output per effective worker is given as:

ε1;t ¼ εþ1;t þ ε1;t : 2

X
t
þ þ
d1;t ¼ d1;0 þ εþ
1;t ¼ d1;0 þ εþ1;t ; 3
j¼1

In general, output in effective worker’s term evolves as:

X
t
 
d1;t ¼ d1;0 þ ε
1;t ¼ d1;0 þ ε1;t ; 4
j¼1

In (raw) worker terms output evolves as:

X
t X
t
t
d1;t ¼ εþ1;j and d1;t

¼ ε1;j : 5
j¼1 j¼1

The production function in equation (5) can be decomposed into a rate of change by transforming into logarithmic function as:

Table 1
Descriptive Statistics of Variables for 15 ECOWAS countries 2005-2017.
LGOV LGCF FDI LRGDP TR

Panel A. 20.65747 20.71900 19.30058 16.70819 69.73776

Summary statistics
Mean
median 20.81657 20.86846 19.41066 17.51757 67.04269
maximum 24.35553 25.05139 22.90268 22.08407 179.1209
minimum 17.69129 16.86158 12.15478 0.763462 7.266159
std. dev. 1.505125 1.666540 1.652595 4.457461 28.03958
skewness 0.239211–0.184399 -0.225730 2.715774
0.643592
kurtosis 2.920918 3.118111 4.195166 10.01238 4.749595
observations 189 175 188 189 184
Panel B.
correlation matrix
LRGDP 1.000000
LGCF 0.276210 1.000000
LGOV 0.314074 0.864344 1.000000
TRADE 0.083720 0.077318 0.010767 1.000000
LFDI 0.332074 0.638510 0.695888 0.272989 1.000000

4
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

lnyit ¼ ln Ait þ α ln kit þ β ln git 6

y is the log transformation of real gross domestic product (GDP) per capita, g is government expenditure, k is the stock of available
capital, and sucscript i and t are the country and time index respectively. Ait is the labour augmenting factor reflecting the efficiency of
labour in country i at time t, and grows at the exogenous constant rate μ. This is further illustrated below:

Ait ¼ Ai0 eμi t þ Iit ρi 7

With Iit being a vector of institutional quality, and other related factors that may affect the level of technology and efficiency in country i
at time t , and ρi is a vector of (unknown) coefficients related to these variables. In this framework, the state of labour-augmenting
technology (A) depends not only on exogenous technological improvements determined by μ, but also on the level of institutional
quality (such as law and order, corruption, socioeconomic condition etc). Utilising Eq. (1) and Eq. (7) in Eq. (6), gives

lnyit ¼ A0 þ ð1  α  βÞμi t þ ð1  α  βÞρi Iit þ α ln kit þ εit 8

Eq. (8) describes productivity (economic growth), as a function of a vector of macroeconomic and institutional variables (which may
change over time); the size of the public sector or government; the level of physical capital and the exogenous growth rate of output. Eq.
(8). can be re-written in a linear form

yit ¼ τyi;t1 þ θdit þ ϑKit þ γXit þ ηi þ εit 9

where subscript i and t are the country and time index, respectively, y is the log transformation of real gross domestic product (GDP) per
capita, d is government expenditure, K is the stock of available capital, X is a vector of other control variables hypothesized to affect
output growth in the extant literature (trade openness and foreign direct investment), ηi is a time-invariant unobserved country-specific
effect term, and εit is the usual error term with zero mean and constant variance.

2.2.1. Model specification on government expenditure shocks

Following existing literature on alternative government spending shocks (Alwagdani, 2014; Heferker & Zimmer, 2009; Hung & Lee,
2010; Kandil, 2001; Mercinger et al., 2017; Oros & Zimmer, 2015) this study extends the work on government spending by looking at
the non-linear structure of government spending. It is non-linear or asymmetric in the sense that positive and negative shocks in
government spending are not expected to have the same effect on economic growth. Hence, eq. (9) is re-estimated to include the in-
tegrated government spending variable:

X
t
dt ¼ dt1 þ ε1;t ¼ d1;0 þ ε1;j ; 10
j

for t ¼ 1, 2, …T.
The constant term d1;0 is the initial value while ε1;j is the error term. The positive and the negative shocks are stated as: εþ
1;t ¼ maxðε1;t ;
þ
0Þ and ε 
1;t ¼ minðε1;t ; 0Þ respectively. Therefore, ε1;t ¼ ε1;t þ ε1;t :The partial cumulative sum of the shocks are constructed as follows:

X
t
þ þ
d1;t ¼ d1;0 þ εþ
1;t ¼ d1;0 þ εþ1;j ; 11
j¼1

X
t
 
d1;t ¼ d1;0 þ ε
1;t ¼ d1;0 þ ε1;j ; 12
j¼1

The positive and negative shocks in government spending are then defined in a partial cumulative form as:

X
t X
t
t
d1;t ¼ εþ1;j and d1;t

¼ ε1;j : 13
j¼1 j¼1

In eq. (13) above, each positive, as well as negative shock, has a permanent impact on the underlying variable. Where dt1;t stands for
positive shocks in government spending and d 1;t stands for negative shocks in government spending. This study adopts a dynamic model
to examine the effect of both positive and negative shocks in government spending on economic growth.
The re-estimated model is then expressed as follows:
 þ
yit ¼ α0 þ τyi;t1 þ θ1 di;t1 þ θ2 di;t1 þ ϑKit þ γXit þ ηi þ εit
14

where yit , the dependent variable, is the real growth rate of the economy (RGDP) in country i and year t, yi;t1 is the lagged of the
dependent variable, Xt is a vector of control variables ηi is a time-invariant unobserved country-specific effect term, and εit andμit e iidð0;
σ 2ε Þ. θ1 dþ 
i;t1 and θ 2 di;t1 indicate positive and negative shocks in lagged government spending. It is important to give hints that

5
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

government spending shocks capture symmetric fluctuations around a steady-state (anticipated) trend over time. In this study, we show
that fluctuations in government spending contribute to expansionary and contractionary shocks to aggregate demand. However, the
shift in aggregate demand is dependent on fluctuations in private spending (i.e. the asymmetric effects of government spending shocks
on economic growth in Eq. (14) is determined by the asymmetric effects of government spending shocks on private spending) (Kandil,
2001). That is, if government finances increase in public spending by issuing bonds, the public may view its holding of government
bonds as an increase in wealth (Modigliani, 1961). Consequently, a positive shock to government spending may stimulate an increase in
private consumption. Conversely, a negative shock may reduce private consumption. It is important to note that, the contractionary
effects of government spending shocks on private consumption may exceed the expansionary effects of government spending shock on
private consumption. This is consistent with findings in extant literature (for details, see Kandil, 2001; Olaniyi, 2019), that consumers
P
react more to negative news than positive news. This implies that tj¼1 ðβ1 β2 Þ < 0 in Eq. (15).

X
t X
t
 þ
Csit ¼ β0 þ νCsi;t1 þ β1 di;t1 þ β2 di;t1 þ ηi þ μit 15
j¼1 j¼1

where Csit is consumption spending, Csi;t1 is the lagged of the dependent variable.
To estimate our models we apply the Generalized Method of Moments (GMM) estimators developed for dynamic panel data. The GMM
estimators are well designed to correct the drawbacks of the previous technique of estimation (such as the OLS) - simultaneity and omitted
bias. The first difference (FD–GMM) eliminates the country-specific effect term ηi in the model. However, this may lead to a biased
estimation of parameters in small samples and larger variance asymptotically Arellano and Bond (1991). To correct this, we apply the
system generalized method of moments (S-GMM) estimator proposed by (Arellano & Bover, 1995; Blundell & Bond, 1998). The S-GMM
state the variables of the model as predetermined variables while treating all the control variables as endogenous. Likewise, the S-GMM
addresses the possibility of simultaneity bias and the problem of correlation in the model by using lagged values of the independent
variables as instruments. The consistency of these S-GMM estimators rests on the assumption that the error terms are not correlated, the
instruments used are valid, and the changes with additional instruments are uncorrelated with country fixed effects. We test for these
assumptions using some diagnostic checks. The first test is the Arellano and Bond test which examines the hypothesis that the error term is
not serially correlated. The second is the Sargan test, which checks the overall validity of the various instruments of the system.
Additionally, as a measure of robustness check, we account for the issue of cross-sectional dependence, which has largely been
ignored in extant studies. This is crucial, since cross-section dependence can arise when a shock to one country is transmitted to other
countries through bloc through macroeconomic interdependence or through contagion (Beck et al., 2011; Bouvet et al., 2013).
Although, most empirical studies (Eicker, 1967; Huber, 1967; Newey & West, 1987; White, 1980, 1984) provide standard error esti-
mates that are heteroscedasticity and autocorrelation consistent, they have largely ignored cross-sectional dependency. That is, these
studies presume that the cross-sectional correlations are the same for every pair of cross-sectional units, therefore, the studies introduce
time dummies to purge the spatial dependence. However, has been shown that constraining the cross-sectional correlation matrix to
dummy variables leads to misspecification. Thus, existing studies fail to adjust the standard errors appropriately. To correct fro
cross-sectional dependency, we adopt the Driscoll and Kraay’s nonparametric covariance matrix estimator, adjusted for use with both
balanced and unbalanced panels along with Monte Carlo simulations (Hoechle, 2007; Driscoll & Kraay, 1998).
Addtionally, to buttress the evidence on the non-linear relationship between government spending and economic growth, this study
investigates the non-linear relationship between the two macroeconomic varibales within the threshold analysis framework. To do this,
this study employs the dynamic panel data with threshold effect and endogeneity developed by Seo and Shin (2016) and made
applicable by Seo et al. (2019) as shown in section 2.1.2., and 2.1.3., below. A major advantage of the dynamic panel threshold model is
that it is appropriate for empirical applications where the threshold effect focuses on one variable and there is no reason to expect a
discontinuous regression response at the threshold. More importantly, the dynamic panel threshold model produces a robust inference
regardless of whether the model has a kink (false threshold) or a jump since the asymptotic normality holds true irrespective of whether
the regression function is continuous or not (Seo & Shin, 2014).

2.2.2. Model specification on dynamic panel threshold

Following Seo and Shin (2016) we consider the following dynamic panel threshold regression model:
   
yit ¼ 1; x’it φ1 1ðqit  γÞ þ 1; x’it φ2 1ðqit > γÞ þ εit; i ¼ 1; :::; n; t ¼ 1; :::; T; 16

where yit is a scalar stochastic variable of interest, xit is the k1 x1 vector of time-varying regressors, that may include the lagged
dependent variable, 1 (.) is an indicator function, q is government spending as a percentage of GDP and the transition variable, γ is the
threshold parameter, φ1 and φ2 are the slope parameters associated with different regimes. The regression error, εit consists of the error
components:

εit ¼ αi þ υit ; 17

where αi is a time-invariant unobserved country-specific effect term and υit is a zero mean idiosyncratic random disturbance. In
particular, υit is assumed to be a martingale difference sequence,

Еðυit = Ft1 Þ ¼ 0

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

where Ft is a natural filtration at time t. xit or qit are not assumed to be measurable with respect to Ft1 . This allows endogeneity in both
the regressor xit and the threshold variable, qit . However, efficient estimation depends on whetherqit is exogenous or not. Seo and Shin
(2016) considers the asymptotic experiment under large Nwith a fixed Twith sample generated from random sampling acrossi.
The dynamic panel threshold model allows for both “fixed threshold effect” and “diminishing or small threshold effect” for statistical
inference for the threshold parameter, γby defining (e.g. Hansen, 2000):

δ ¼ δn ¼ δ0 nα for 0  α < 1=2:

It is well-established in the linear dynamic panel data literature that the fixed effects estimator of the autoregressive parameters is
biased downward (e.g. Nickell, 1981). To deal with the correlation of the regressors with individual effects in (16) and (17), and
following Arellano and Bond (1991) and Seo and Shin (2016) and Seo et al. (2019) we consider the first difference transformation of
(16) as follows:

Δyit ¼ β’Δxit þ δ’Xit’ 1it ðγÞ þ Δεit ; 18

!  
β ¼ ðφ12 ; :::; φ1;k1þ1 Þ’; δ ¼ φ2  φ1 ; ð1; xit’ Þ 1it ðγÞ ¼ 1ðqit > γÞ
where Δis the first difference operator and ¼ Xit
.
k1 x1 k1 x1 2 xð1þk1 Þ ’
ð1; xi;t1 Þ 2x1 1 ðqit1 > γÞ
Let θ ¼ ðβ’;δ’;γÞ’and assume that θbelongs to a compact setΘ ¼ ΦxΓ⊂ℝk , withk ¼ 2k1 þ 2. The transformed model, (17) consists of 4
regimes, which are generated by two threshold variables, qit and qit1 (Seo & Shin, 2016). Thus, the OLS estimator obtained from (17) is
not unbiased since the transformed regressors are now correlated withΔεit . To correct for this problem Seo and Shin (2016) suggests
l x 1vector of instrument variables, ðzit’ 0 ; :::; ziT
’
Þ’ for2 < t0  T, such that either
 
Е z’it0 Δεit0 ; :::; z’iT ΔεiT ’ ¼ 0; 19

or for each t ¼ t0 ; :::; T;

ЕðΔεit = zit Þ ¼ 0: 20
Note: zit may include lagged values of (xit qit ) and lagged dependent variables if not included in xit orqit . Also, the number of in-
struments may be different for each timet.
The dynamic panel data with threshold effect and endogeneity fulfils the conditions specified in Eqs. (19) and (20). It models a
nonlinear asymmetric dynamics and cross-sectional heterogeneity, simultaneously, in the dynamic threshold panel data framework, in
which both threshold variable and regressors are allowed to be endogenous. Further, the dynamic panel threshold model allows for the
lagged dependent variables and endogenous covariates. Hence, this study adopts the dynamic panel threshold model developed by Seo
and Shin (2016) and made applicable by Seo et al. (2019).

2.2.3. Kink model

Although the threshold model typically implies the presence of a discontinuity of the regression function, Seo and Shin (2016) argue
that it might mean the presence of a kink, not a jump ifð1; xit’ Þδ ¼ κðqit γÞ for someκ. According to them, this happens when one element
ofxit is qit with the coefficient κand the first element of δequals to  γκ. Under these restrictions, the model becomes

yit ¼ x’it β þ κðqit  γÞ1fqit > γg þ αi þ εit ; i ¼ 1; :::; n; t ¼ 1; :::; T: 21

Seo and Shin (2016) show that the asymptotic distribution of the GMM estimator remains valid even when the model is a kink one.
This is in contrast to the least-squares estimator for the linear regression which shows the presence of the cube root phenomenon
(Hidalgo, Lee, & Seo, 2019). For details, see Seo et al. (2019).

2.3. Panel data unit root test

Before investigating the relationship between government expenditure and growth, it is important to investigate the stationarity
properties of the model in order to avoid spurious regression. Previous empirical studies have investigated the relationship between
government spending and economic growth on the assumption that the fiscal variables (such as government spending) are linear and
level stationary. Few studies investigated the presence of unit roots but they do so using the basic linear unit root tests, such as, the LLC
Breitung’s t-statistic, the IPS, and the ADF- and PP–Fisher χ2 which assumes a unit root under the null and asymmetric adjustment
process under the alternative. This is an indication that previous tests are misspecified if the adjustment dynamics are non-linear or
asymmetric. Similarly, the traditional approach in which dummy variables are used to account for breaks and the smooth transition
approach which allows for a gradual structural shift has also been employed. However, these approaches require to know dates, number,
and functional form of breaks (Nazlioglu & Karul, 2017). In order to relax the requirement for such a priori knowledge and ultimately to
determine the correct order of integration and the existence of breaks in the fiscal variables (in our case, government spending), and
following Lee et al. (2011); Im et al. (2005); and Karavias and Tzavalis (2014) we perform the Lagrange multiplier (LM) panel unit root
tests in the presence of structural breaks which allow for smoothing structural changes in deterministic terms in a panel study.

7
O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

2.3.1. Panel unit root test result

Testing for stationarity property values has been described as fundamental in order to determine the appropriateness of the
methodology. This study carries out an array of panel unit root tests in order to deliver reliable and unbiased estimates. As earlier
emphasized, previous studies investigated the presence of unit roots but do so using the basic linear panel unit root tests, such as, the LLC
Breitung’s t-statistic, the IPS, and the ADF- and PP–Fisher χ2 which assume a unit root as the null hypothesis and a symmetric adjustment
process under the alternative (Seo and Linton, 2007) (2014). These tests are misspecified if the adjustment dynamics are non-linear or
asymmetric.
As a preliminary analysis, we apply a battery of linear unit root tests to determine the order of integration of the variables in the
model. The Results are presented in Tables 3 and 4, respectively. It is necessary to state that both LLC and Breitung assume common unit
root processes among cross-sectional units. On the other hand, IPS, ADF–Fisher and PP-Fisher χ2 assume individual unit root processes
across cross-sectional units. In testing the unit root, the optimal lag lengths are selected based on Schwarz information criterion. The
results of unit root tests with individual effect only are presented in Table 2, while Table 3 provides the results of individual effect and
trend. As shown in Table 2 above, the results of all the four tests indicate that government expenditure (LGOV), real GDP (LRGDP), gross
capital formation (LGROSS_CF), foreign direct investment (LFDI) attain stationarity at level, i.e., [I (0)] without first-differencing since
two out of the four panel unit root tests reject the null hypothesis of unit roots for all cross sections. Similarly, the result in Table 3 shows
a similar pattern to the result in Table 2, with the orders of integration at I (0), and not exceeding 1. This shows that panel cointegration
tests, which are common in studies, may not be appropriate. Thus, the dynamic GMM technique adopted in this study is more
appropriate.
However, as pointed out in the literature, in the presence of a structural break, the power to reject a unit root decreases if the
stationary alternative is true and the structural break is ignored Im et al., 2003; Im et al., 2005; Karavias & Tzavalis, 2014. Thus, in order
to avoid misspecification and also to account for structural breaks in fiscal variables (i.e. government spending) because of the
importance of structural changes in the behaviour of fiscal variables, we perform the Lagrange multiplier (LM) panel unit root tests in the
presence of structural breaks on government spending. More importantly, our panel unit roots test have better power to distinguish
between the null hypothesis of unit roots and its alternative of stationarity, as they can exploit both cross section and time series in-
formation of the data. Our panel unit root tests with structural breaks in Table 4 unanimously reject the null hypothesis of unit roots for
all cross-sections, as well as the combined panel. However, the Results accept the null hypothesis of unit root hypothesis of one break
point at 10 percent level of significance. This shows that government spending is only stationary at first difference, i.e., [I (1)]. This
suggests that the presence of structural breaks in government spending slightly influences the order of integration of our fiscal variable
(see Table 4 above).

2.4. Tests of cross-sectional dependence

In order to test the assumption of cross-sectional independence implicitly assumed in previous methods, we perform a cross-sectional
dependence test, as shown in equations (22) and (23) below.
Given a standard panel-data model:

yit ¼ αi þ β’ Xit þ μit ; i ¼ 1; :::; N and t ¼ 1; :::T 22

where Xit is a K x 1 vector of regressors, β is a k x 1 vector of parameters and αi represents time invariant country-specific parameters. μit is
set under the null of independent and identically distributed (i.i.d.) over periods and across cross-sectional units. Under the alternative,
μit may be correlated across cross sections, but the assumption of no serial correlation remains.
Thus, we test the following hypotheses:
 
H0 : ρij ¼ ρji ¼ cor μit ; μjt ¼ 0 for i 6¼ j

Table 2
Panel unit root tests individual effects only.
Variables LLC Breitung IPS ADF-Fisher PP-Fisher

LGOV 6.78429*** – 2.09708** 49.4437*** 82.9229***

LRGDP 3.57554*** – 2.67393*** 57.8522*** 62.5995***
LGROSS_CF 5.8911*** – 1.7358** 41.3466** 63.1043***
LFDI 3.57554*** – 2.67393*** 57.8522*** 62.5995***
TRADE 2.43560*** 0.73319 40.1605 45.2215**

ΔLGOV 5.74212*** – 3.64006*** 65.7546*** 105.062***

ΔLRGDP 11.7907 – 6.80997*** 99.3763*** 157.545***
ΔLGROSS_CF 6.84048*** – 4.72888*** 70.0471*** 139.174***
ΔLFDI 2.94010*** – 2.91589*** 56.2276*** 127.519***
ΔTRADE 1.68040** 0.1257 40.3776* 104.504***

Notes: Δrepresents first difference operator. *, **,*** denote 10, 5 and 1 percent levels of significance, respectively.

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

Table 3
Panel unit root tests individual intercept and trend.
variables LLC IPS ADF-Fisher PP-Fisher

LGOV 5.03236*** 0.25586 29.8159 45.6311**

LRGDP 7.011096*** 1.36261* 43.7150** 120.310***
LGROSS_CF 7.22963*** 1.38303* 38.5866** 50.4195**
LFDI 2.28408*** 0.67014 38.2486 53.0095***
TRADE 2.27351*** 1.20155 22.5297 31.7592

ΔLGOV 7.53546*** 3.06537*** 72.9597*** 141.087***

ΔLRGDP 12.5092*** 4.40286*** 85.1971*** 151.326***
ΔLGROSS_CF 6.31092*** 2.76412*** 56.9833*** 144.555***
ΔLFDI 3.02968*** 0.82488 35.2235 92.4701***
ΔTRADE 1.35132* 0.18419 25.6958* 80.7840***

Notes: Δrepresents first difference operator. *, **,*** denote 10, 5 and 1 percent levels of significance, respectively.

Table 4
Panel unit root tests (accounting for structural breaks in government spending using LM test).
Nigeria

variables cross-section test statistics break location number of lags conclusion

Two break model Reject the null
LGOV 5.124 2004, 2010 4
One break model
LGOV 6.436 2003 4 Reject the null
Full Panel
variables cross-section test statistics break location number of lags conclusion
Two break model N/A N/A Reject the null
LGOV 4.01248
One break model
LGOV 6.0215* N/A N/A Accept the null

N/A means not available.

H1 : ρij ¼ ρji ¼ 0 for some i 6¼ j

where ρij is the product-moment correlation coefficient of the disturbances and is given by
PT
t¼1 uit ujt
ρij ¼ ρji ¼ P  PT 2 1=2 23
T 2 1=2
u
t¼1 it t¼1 uit

The number of possible pairings (uit ; ujt ) rises with N.

As eaerlier noted, as a form of robustness check, and in order to avoid misleading inferences regarding the relationship among the
variables, there is the need to perform cross-sectional dependence test on our data to ensure that the cross-section in the model are
independent for consistent coefficient estimates (Pesaran, 2004). To do this, we adopt the Pesaran’s CD test. This is because, unlike the
LM statistic, the CD statistic has mean at exactly zero for fixed values of T and N, under a wide range of panel-data models, including
homogeneous/heterogeneous dynamic models, nonstationary models and unbalanced Panels Nickell, 1981 and (Pesaran & Smith,
1995).

2.5. Discussion of empirical findings

To avoid criticism concerning the sensitivity of the Results to the choice of lags implied by a given test, and following Kandil (2001)
the lag length chosen for positive and negative shocks to measure the difference in variables’ adjustments to these shocks over a given
time span is equal. Other variables enter the model with the same lag length to control for their possible correlation with positive or
negative government spending shocks. It is important to emphasize that this study utilizes the two-step GMM technique proposed by
Arellano and Bond (1991). This produces reliable estimates that are more asymptotically efficient than one-step GMM estimates.
Similarly, the validity of the instrumental variables adopted is confirmed with the aid of Sargan test of over-identifying restrictions. It
shows that the instrumental variables are valid. The null hypothesis is accepted which demonstrates that instruments are not correlated
with the error term. The robustness of GMM estimates is further established as the results of AR (2) confirm that the model does not
suffer from the problem of serial autocorrelation. Also, other diagnostic measures such as the F-statistic further confirms the reliability of
our model, hence the estimates are robust and reliable (see Table 5). The results of our system GMM estimation is presented in Table 5
above. The result in Table 5 justifies the inclusion of the lagged dependent variable, LRGDP (1) as an explanatory variable in the
dynamic panel data model. The results show a positive and statistically significant impact of LRGDP (-1) on LRGDP. This shows that
previous LRGDP is a significant determinant of the current LRGDP. The significant coefficient of the previous LRGDP as indicated in

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

Table 5
Pesaran CD test.
Pesaran’s test of cross sectional independence 11.810***

Average absolute value of the off-diagonal elements 0.608

Note: On average, the (absolute) correlation between the residuals of two variables
is 0.567. *** denotes 1 percent level of significance.

Table 5 shows that the ordinary least square (OLS), GLS, WG, and static panel estimators like fixed effects (FE) and random effects (RE)
are inappropriate methods, since the lag dependent variable can also be an explanatory variable. Thus, this confirms the appropriateness
of the dynamic panel data model via the S-GMM used in this study (Acemoglu & Robinson, 2008).
Our Results show that the cumulative effects of positive and negative government spending shocks are of opposite signs in explaining
growth in real GDP per capita. Accordingly, the cumulative effect of expansionary government spending shocks on real GDP is negative,
although statistically insignificant (implying a weak negative impact on economic growth). This is in line with the findings of Barro
(1974), who argue that it may be optimal for households to react to an increase in deficit by increasing their saving by an equal amount.
As a result, aggregate demand may not rise. The decrease in real GDP per capita suggests that the rise in the real return to saving in-
creases savings appreciably in response to expansionary government spending shocks. Thus, the rise in private savings leads to a
decrease in real GDP per capita.
Contrastingly, the cumulative effect of contractionary government spending shocks is positive and statistically not significant
(implying a weak positive effect) on growth in real GDP per capita. Trade openness (TRADE) shows a negative and statistically sig-
nificant effect on economic growth. This result conforms with the findings of Imam and Kpodar (2015) and Smaoui and Nechi (2017)
that openness to international trade could result in lower economic growth since it renders countries more vulnerable to exogenous
shocks, especially in the presence of high export concentration. In contrast, the sign of the estimated coefficient of capital stock (LGCF) is
consistent with classic theories of economic growth and development (Harrod-Domar growth model, Solow growth model, Endogenous
growth model, etc.). Capital stock exerts a positive and statistically significant impact on economic growth, confirming that capital stock
stimulates growth in developing economies. This is also in line with recent endogenous growth models which show that human capital
accumulation is an important source of long-term growth (Lucas, 1988; Romer, 1990; Becker et al., 1990). However, foreign direct
investment (LFDI) shows no statistically significant impact on economic growth in ECOWAS.
Similarly, our Results show evidence of asymmetry in the response of private consumption to government spending shocks (see
Table 6). Specifically, the result indicates that consumers react differently to positive and negative government spending shocks. For
example, expansionary government spending shocks exert a negative effect on private consumption, although statistically insignificant.
This supports our earlier findings that private agents decrease consumption in anticipation of future tax liability associated with
increased government spending. This is in support of Barro’s (1974) view that agents foresee future tax liabilities associated with the
increased government spending, and as a result, private consumption decreases (i.e. increase private savings) in response to the
increased government spending. Consequently, the reduction in private consumption (i.e. increase in private savings) limits demand
expansion. However, the result negates the view that the public may view its holding of government bonds (occasioned by government’s
decision to finance the increase in public spending by issuing bonds) as an increase in wealth such that a positive shock to government
spending may stimulate an increase in private consumption. Accordingly, the reduction in income and wealth (i.e., government bonds
held by private agents) following a contractionary government spending shock may decrease private consumption, as shown by the
cumulative positive, albeit statistically insignificant effect of contractionary government spending shocks on private consumption.
The result in Table 5 shows that Pesaran’s CD test rejects the null hypothesis of spatial or cross-sectional independence on any
standard level of significance. This shows that estimated Results from other econometric methods might have suffered from cross-
sectional dependence. Having affirmed the presence of cross-sectional dependence, as revealed in Table 5 above, therefore, to ac-
count for cross-sectional dependency, we adopt the Driscoll and Kraay’s nonparametric covariance matrix estimator, adjusted for use
with both balanced and unbalanced panels along with Monte Carlo simulations (Hoechle, 2007; Driscoll & Kraay, 1998). Unlike,
previous methods, such as the feasible generalized least squares (FGLS) proposed by Parks (1967) and popularized by Kmenta (1986) is
typically inappropriate if the panel’s time dimension T is smaller than its cross-sectional dimension N which is almost always the case for
microeconometric panels (Beck & Katz, 1995). Similarly, other studies have applied the panel corrected standard errors (PCSE) by Beck
and Katz (1995) to account for cross-sectional dependence in panel data models. However, the finite sample properties of the PCSE
estimator are rather poor when the panel’s cross-sectional dimension N is large compared to the time dimension T (as in our own case).
Our Driscoll and Kraay’s nonparametric approach eliminates the deficiencies of other large T consistent covariance matrix estimators
associated with the Parks-Kmenta (FGLS) or the PCSE approach.(see Table 7)
The Results of Driscoll and Kraay’s nonparametric covariance matrix estimator show a slightly different scenario (see Table 8),
however, it supports our earling findings on the asymmetric effect of government spending on economic growth. Specifically, the cu-
mulative effect of expansionary government spending shocks on economic growth is positive and statistically significant. While the
cumulative effect of a contractionary government spending exerts a negative and statistically significant impact on economic growth.
This is in line with the theoretical position that if government finances increase in public spending by issuing bonds, the public may view
its holding of government bonds as an increase in wealth (Modigliani, 1961). Consequently, a positive shock to government spending
may stimulate an increase in private consumption and ultimately, induce growth. Accordingly, a negative shock may reduce private
consumption. Although, this result differs slightly from our system GMM estimates, both results, however, support extant studies on the
non-linear relation in the government spending-growth nexus (Atems, 2019; G
omez-Puig & Sosvilla-Rivero, 2017; Hung & Lee, 2010;

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

Table 6
Results of General Method of Moments estimation on the effect of
government spending shocks on economic growth
Variable LRGDP

SYS -GMM
LRGDP (-1) .5876***
ΔLGOV -.0404
LFDI .0116
TRADE -.0042***
LGCF .2095***
ΔLGOVþ 5.90e-13
ΔL GOV- -.0042

Significant levels (p-values)

F-statistic 3224.55
Prob (F-statistic) 0.0000
Sargan 0.9778
AR (1) 0.1007
AR (2) 0.9146
Observation 145

Notes: *, **,*** denote 10, 5 and 1 percent levels of significance,

respectively. LGOVþ, and LGOV- are positive shocks and negative
shocks to government spending respectively.

Table 7
Results of General Method of Moments estimation and Driscroll and Kraay on
the effect of government spending shocks on economic growth
variable LRGDP

SYS -GMM Driscoll-Kraay

LRGDP (-1) .5876*** -
ΔLGOV -.0404 -
LFDI .0116 .06502*
TRADE -.0042*** .0013
LGCF .2095*** -
ΔLGOVþ 5.90e-13 2.63e-11***
ΔLGOV- -.0042 -1.58e-11***

Significant levels (p-values)

F-statistic 3224.55 3.19
Prob (F-statistic) 0.0000 0.0566
Sargan 0.9778
AR (1) 0.1007
AR (2) 0.9146
Observation 145 158

Table 8
Results of General Method of Moments on the effect of government spen-
dingShocks on private consumption.
Variable Private consumption

System GMM
Lprivate consumption (-1) 0.9047***
ΔLGOVþ 1.19e-11
ΔLGOV- 2.28e-11
Cons 2.198***

Significant levels (p-values)

F-statistic 10024.91
Prob (F-statistic) 0.0000
Sargan 0.9641
AR (1) 0.0083
AR (2) 0.1076
Observation 176

Notes: *, **,*** denote 10, 5 and 1 percent levels of significance, respec-

tively. LGOVþ, and LGOV- are positive shocks and negative shocks to
government spending respectively.

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

Kim et al., 2018; Makin, 2013; Çulha, 2017) and also confirms our
a priori expectation that the relationship between government
spending and economic growth may not be linear but asymmetric.
Table 9 presents the Results from the estimation of the threshold model (15). Specifically, we estimate the optimal level of gov-
ernment spending. Similarly, we determine its non-linear impact on economic growth when it is above and below the threshold level. In
other words, we assess empirically the validity of BARS curve. We found strong evidence of the existence of an inverted “U-shaped”
relationship between government spending and economic growth. The result shows that the optimal threshold level of government
spending is 21.49%. This falls within the range reported in the related literature. For example, Asimakopoulos & Karavias, (2015) in a
study of both developed and developing countries, finds that the optimal level of government size that maximises economic growth is
18.04% for the full sample; 19.12% for developing and 17.96% for developed countries. Similarly, Karras (1997), in a sample of 20
European countries, finds that the optimal level of government spending is equal to 16%. Gunlap and Dincer (2010), in a sample of 20
transition countries, reports a threshold of 17.3%. In country-specific studies, Chen and Lee (2005), Chiou-Wei et al. (2010) and Altunc
and Aydin (2013) report a threshold estimation within the range of 11–25%. %. In particular, our results show that when government
spending on the average is below the threshold, a 1% increase in government spending, as a percentage of GDP, enhances economic
growth by 0.10%, while above the threshold, a 1% increase in government spending decreases growth by 0.11%. In our sample, the
average government spending in ECOWAS is 20.65%. This indicates that government spending in ECOWAS is very close to the optimal
level.
In sum, the available evidence suggests that there is an asymmetric impact of government spending on economic growth in ECOWAS.
Regarding the remaining variables, we find that capital formation is positive and statistically significant when government spending is
above the threshold. The sign of the estimated coefficient of capital stock (lgrosscf) is consistent with classic theories of economic growth
and development (Harrod-Domar growth model, Solow growth model, Endogenous growth model, etc.). This relationship is statistically
significant at the 5 per cent level confirming that capital stock stimulates growth in developing economies. This suggests that developing
countries may have increased capital spending (physical and human capital) relative to consumption spending. In contrast, trade
openness shows a negative and statistically significant impact on economic growth, as established in the related literature (Imam &
Kpodar, 2015; Smaoui & Nechi, 2017).

3. Conclusions, policy implication and recommendation

This paper examined asymmetry or non-linearity in the effect of government spending on economic growth in ECOWAS. The evi-
dence suggests that there is a differential impact in the effects of expansionary and contractionary shocks to government spending on

Table 9
Threshold estimate of government spending using the dynamic panel threshold with a kink.
Dependent variable (lRGDP) [95% Conf. Interval]

Lag_y_b .7274* [.5101079 .9448683]

lgovexp_b -.3877*** [-.2895598 2.120008]
lgrosscf .4152 [-.6081358 1.438635]
Trade_b -.0029*** [-.0052884 -.0006308]
Kink_slope .4384 [-2.230246 3.107221]
r 22.264*** [21.26763 23.26058]

Government Spending

Bootstrap p-value 0.0000

Threshold estimate 21.49374
95% confidence interval (13.38698 29.6005)
lower regime (δ)
Lag_y_b 36.3948***
lgovexp_b 0.1085***
Trade_b 0.7999*
lgrosscf 0.2423
upper regime (δ1)

Lag_y_b 36.3948**
lgovexp_b 0.1125
Trade_b 0.7891*
lgrosscf 0.2960**

Notes: Lag_y_b denotes the endogenous independent variable (government spending(-1)), lgovexp_b denotes
government spending, lgrosscf denotes gross capital formation, Trade_b is trade openness, Kink_slope controls for
the existence of a kink in the model and r represents the threshold value of government spending. *, **,*** denote
10, 5 and 1 percent levels of significance, respectively.
Note: The bootstrap algorithm to test for the presence of the threshold effect is set under the null hypoth-
esisH0 : δ0 ¼ 0. Lag_y_b denotes the endogenous independent variable (government spending (1)), lgovexp_b
denotes government expenditure, Trade_b is trade openness. *, **,*** denote 10, 5 and 1 percent levels of sig-
nificance, respectively.

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O.O. Olaoye et al. The Journal of Economic Asymmetries 22 (2020) e00180

economic growth. For the interpretation of Results, we focus on the estimates provided by Driscroll and Kraay non-parametric estimator.
This is because, unlike previous estimates that fail to account for cross-sectional depency and cross-country heterogeneity, our Driscroll-
Kraay estimates are robust to cross-sectional dependency. Our results show that the cumulative effects of positive and negative gov-
ernment spending shocks are of opposite signs in explaining unanticipated growth in aggregate demand (proxied by real GDP). The
results from our system GMM estimates and Discroll-Kraay estimates support extant studies on the non-linear relation in the government
spending-growth nexus (Atems, 2019; G
omez-Puig & Sosvilla-Rivero, 2017; Hung & Lee, 2010; Kim et al., 2018; Makin, 2013; Çulha,
2017) and also confirms our
a priori expectation that the relationship between government spending and economic growth may not be
linear but asymmetric. Asymmetry also applies to the response of private consumption to government spending shocks. The result shows
that consumers react differently to positive and negative government spending shocks. There is a positive and statistically significant
impact of expansionary government spending shocks on private consumption. This indicates that agents do not decrease consumption
(i.e. do not increase savings) in anticipation of future tax liability associated with expansionary government spending shocks.
Similarly, the result shows that the inverted “U-shaped” non-linear relationship between government spending and economic growth
is statistically significant for ECOWAS. That is, there is strong evidence of the existence of an inverted “U-shaped” relationship between
government spending and economic growth. This is an indication that the effect of government spending on economic growth in
ECOWAS is asymmetric. The result shows that the optimal threshold level of government spending is 21.49%. That is, beyond the
optimal threshold, government spending exerts a negative influence on economic growth in ECOWAS. This might be an indication that
the standard crowding-out effect is in operation in ECOWAS. This crowding-out shows that there is a negative effect of increasing
government expenditure on private consumption and investment via an increase in the real interest rate. This would be the case if a
government deficit (a result of increasing government spending) arises, and the deficit is financed by domestic debt. The theoretical
literature notes that debt financing might lead to a credit squeeze and a subsequent increase in real interest rates. This Results in the
crowding out of private consumption and investment, causing government expenditure not to granger-cause economic growth (Olaoye
et al., 2020).
Following the findings emanating from this study, we make the following policy recommendation. One, for developing countries,
governments should consider the negative effect of expansionary government spending shocks on private consumption in their attempt
to increase government spending near full-equilibrium, especially in ECOWAS, where capacity utilization and unemployment are
critical issues. Accordingly, the negative effect of an increase in government spending on private consumption is likely to become
moderate below full-equilibrium. Two, although, the need for government intervention in developing countries for improved economic
development has been identified (World Bank, 2005), however, a greater role for the government does not necessarily mean the need for
higher expenditures and the revenues required to finance them. Indeed, to reduce crowding-out effect of government spending, gov-
ernment may need to get the private sector involved (through Private Public Partnership (PPA)) in the funding of public infrastructure,
and/or may need to concentrate on the provisions of such public goods as macroeconomic stability, justice, external defense, a clean
environment, and dispute resolution. Moreso, government is better positioned to fight poverty or destitution and to defend individual
rights and social stability (Dreze & Amartya, 1991; World Bank & Blanca, 2008).

CRediT authorship contribution statement

Olaoye Olumide O: Conceptualization, Methodology, Software, Writing (Original draft preparation), Investigation, Supervision,
Reviewing and Editing and Validation.
Eluwole Oluwatosin O: Data curation, Resources, and Software.
Ayesha Aziz: Resources, and Acquisition of financial support.
Afolabi Olugbenga O: Visualization, and Project administration.

Declaration of competing interest

On behalf of the authors, I write to declare that there is no conflict of interest with regards to the publication of this manuscript.
Source: Authors’ computations, 2019. Note LRGDP, LGOV, LGCF, LFDI are the natural logarithm of real gross domestic product,
government expenditure and gross capital formation and foreign direct investment respectively. While TRADE and indicates Trade
openness.

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