The impact of government size on economic growth: A threshold analysis

•We examine the impact of government size on economic growth.•A large dataset of developed and developing countries is used.•An inverted “U-shape” relationship is uncovered.•This relationship is robust for developed and developing countries.•We find asymmetries in developed and developing countries around the optimal level.

We examine the nature of the relationship between government size and economic growth and identify the optimal level of government size using a large dataset through a novel and very general non-linear panel Generalized Method of Moments approach. We show that this relationship is statistically significant above and below the optimal level, even after splitting our sample to developed and developing countries. Finally, we find an asymmetric impact of government size on economic growth in both developed and developing countries around the estimated threshold.