The Role of Governance in the Impact of Budget Balance on Growth: Panel Data Analysis

Abstract

This study aims to reveal the role of governance in the relationship between budget balance and economic growth. For this purpose, unlike the previous studies in the literature, Hansen's (1999) panel threshold regression analysis was used as a method. A total of 28 countries covering the period 2006-2018 were selected as samples. Findings from the fixed effects model show a positive and nonlinear relationship between budget balance and economic growth. Findings from the panel threshold method, on the other hand, show that governance is an important tool in determining the size of the effects of the budget balance on economic growth. Budget surplus both below and above the threshold value obtained from the analysis positively affects economic growth. However, the positive effect of the budget surplus in countries with poor governance (where governance is below the threshold) on economic growth is much more effective and significant than the budget surplus in countries with good governance (where governance is above the threshold).