Government Size and Economic Growth in Iran: A Smooth Transition Approach

In this paper we study the existence of the Armey curve in Iran، which states that there is an inverted U-shaped relationship between the government size and the economic growth. To that end، we use quarterly data during 1988:1-2008:2. Instead of relying on a binomial model، which is very popular in the literature، we use a smooth transition regression (STR). STR models are very flexible، and binomial models are considered as a special case of the STR models. The results show that there is a nonlinear connection، i. e.، a threshold effect، between the government spending and the growth rate in the Iran''s economy. The threshold level of government size is 14. 29% of the GDP. However، we cannot confirm the existence of Armey curve in the Iran''s economy because the relationship is negative in the first regime (before the threshold) and it is positive in the second regime. In other words، the link between the government size and economic growth is U-shaped in Iran.