Reinvestigating the Role of Government in the Iranian Economy: An Application of the Bounds Test Approach

This paper studies the relationship between economic growth and government size of Iran using ARDL and Bounds Test Approach during 1967-2013. Opposite to other studies which concentrate on accepting or rejecting the Army Curve (an inverted U shape or quadratic curve that relates government expenditures and GDP growth) in Iran, the results of this paper show that GDP growth and government expenditures have cubic relationship. This functional form, which has been introduced by Anaman (2004) for the first time, shows that the relation between economic growth and government size are negative for low and high level of government size both in the short-run and long-run while the relationship between economic growth and government size are positive for medium level of government expenditures both in the short-run and long-run.