Effect of government spending on non-oil GDP of Bahrain

This paper uses the equilibrium approach to fiscal policy to study the effects of government spending on non-oil GDP of Bahrain within a two-country framework. The empirical implementation employs Bahrain and US annual data for the period 1977-2004. Results strongly suggest that the positive multiplier effect of permanent domestic government consumption is substantially neutralized by the negative impact of temporary US government spending on non-oil GDP of Bahrain. This result is significant and seems to be implied in many theoretical discussions but has largely been ignored in empirical research.