Non-Linear Effects of Government Size on Inflation in OPEC Countries: A Threshold Panel Approach

Abstract

The purpose of this paper is to consider the relationship between inflation and government size in OPEC countries during the period 2000-2015. Estimation results from different linear panel models with quadratic form of government size and non-linear panel models including static and dynamic panel threshold models suggest that there is a non-linear relationship between government size and the inflation rate in these countries. The threshold value of government size is estimated as 17.76% for all the threshold panel models with different control variables. Below this threshold value, an increase in government size has a significant negative impact on the inflation rate. When government size grows larger, an increasing government size has a significant positive impact on the inflation rate. This paper suggests that it is possible to explain the contradictory evidence of previous studies by making use of a non-linear model.