Examining the impact of government spending on the finance-growth nexus: evidence from post-communist economies

ABSTRACT This study examines the impact of government spending on the finance-growth nexus in 27 post-communist economies from 1995 to 2017 using dynamic panel estimators. Many transitional economies have attempted to reduce the influence of government intervention during their early transitional period while reforming their respective financial sectors. The findings show that overall financial development is positive to growth, while government spending has a negative impact on growth. More importantly, the marginal effects of financial development are positive to growth at low levels of government spending. In contrast, at high levels of government spending, financial development has a negative relationship to growth. Focusing on different aspects of financial development, the findings show that financial access and efficiency are more effective at stimulating growth compared to financial depth. Post-communist economies should ensure that government spending should not crowd out the financial sector, and promote financial efficiency and accessibility.