The Optimal Size of Government in Point of View Achieving Maximum Economic Welfare in Iran

اقتصاد پولی مالی

Article 6, Volume 21, Issue 7, January 2015, Pages 127-155   

Document Type: پژوهشی

DOI: 10.22067/pm.v21i7.43018

Authors

Mozhgan Moallemi^* ; Mohammad Reza Ghasemi; Hedayat Karimzadeh

Abstract

Government size and its effects on an economy is one of the important issues in
economic researches. Recently, many attempts have been made to determine the
optimal size of government and its effects on economic growth in most countries,
spatially in the developing countries. Since, economic growth is just one of the
dimensions of development, it is not sufficient the investigation of economic growth
index in order to determine the optimal size of government. So the index of
economic well-being (IEWB) is needed to express the state of social welfare.
In this paper, consistent to Osberg and Sharp (1998), the index of economic well being (CIEWB1) will be calculated for period of 1978-2007. Then we investigate the
relationship between the size of government and economic well- being based on
Armey nonlinear model in order to determine the optimal size of government.
Moreover, the paper, analyzes the long- term relationship between them by using an
auto-regressive distributed lag model (ARDL) as well as long- term Dynamics by
vector auto-regressive process.
The Estimation results reveal a nonlinear relationship between government size and
economic welfare for Iran. The results imply that the optimal size of government is
20.8% and 5.9% based on the ratio of consumption and investment expenditure,
respectively. Also, there is no a long- term relationship between government size
(based on two indexes) and index of economic well-being. Moreover, the results
show that the effects of fluctuations of government size on economic welfare are not
permanent.

Keywords

Economic Welfare; Optimal Size of Government; CIEWB Index; Investment Expenditure and Consumption Expenditure of Government; Army's Model

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