Government size and output volatility in Sub-Saharan African Countries: do threshold levels exist?

This study aimed to examine the threshold effects of government size on output volatility using a panel of 22 Sub-Saharan African (SSA) countries spanning over the 1997–2021 period. Hansen’s threshold methodology was used to estimate threshold levels of government size on output volatility. The findings show that there is a threshold value of government size on output volatility in SSA countries. The study further reveals that government size below the estimated threshold positively impacts output volatility more than above the threshold level. The implication is that smaller government size amplifies output volatility and this may partially support the Keynesian paradigm. The study further revealed that only financial development and inflation variables have a negative and statistically significant relationship with output volatility. Foreign direct investment, trade openness, and institutional quality index factors are weakly and positively related but have a statistically insignificant relationship with output volatility. These findings have policy implications such that policymakers should consider the estimated threshold level to mitigate output volatilities. Further, the development of the financial sector and economic diversification are key to addressing the volatility of output that may be brought by economic globalization in SSA countries. Achieving macroeconomic stability with a stable environment, investment, and economic growth is the goal of every national government. High levels of output volatility have negative welfare effects such as poverty, unemployment, and inequality. In sub-regions such as Sub-Saharan Africa, output volatility has been one of the challenges facing these national economies. Despite attempts to reduce output volatility in the region, it is still high according to world standards. There is a general view that the levels of government expenditure can play a significant role in either aggravating or mitigating the existing output volatility in the sub-region. However, policymakers do not know the exact ranges of government expenditure that can aggravate or reduce output volatility in their countries. Therefore, this study aims to investigate the threshold levels of government size on output volatility so that policy recommendations can be drawn based on optimal government sizes in these regions. Further, the study’s findings are likely to reveal other factors that cause output volatility, and knowledge of these factors can also inform policy actions to be taken to complement optimal government sizes to reduce output volatility.