Does the BARS curve exist in the case of newly democratized countries: the story of macroprudential policy switching

Purpose The study aims to examine the validity of the Barro (1989), Armey (1995), Armey and Armey (1995), Rahn and Fox (1996), and Scully (1994, 1995) (BARS) theory during macroprudential policy regimes and determine the level of government expenditure’s impact on growth in newly democratized African and Asian countries from 1983 to 2023. Design/methodology/approach The methodology involves selecting the appropriate transition variable, determining whether government spending and economic growth are linear, and determining the transition function’s order. The wild cluster bootstrap-Lagrange Multiplier (WCB-LM) test evaluates the model, while the panel smooth transition regression model with two regimes checks its validity. Findings The study found nonlinear effects of government expenditure on economic growth, with a threshold level of a 29.32% share of gross domestic product for newly democratized African countries and a 19.63% share for newly democratized Asian countries in a macroprudential policy regime above which government expenditure caused growth to decline. The findings confirm the BARS theory. Originality/value The current study tested the BARS U-shaped hypothesis in newly democratized countries. Unlike the traditional growth-spending analyses, it incorporates macroprudential policy switching under the time-varying cyclically adjusted primary balances (CAPB) by investigating the fiscal-macroprudential interactions and sectoral employment. It offers a novel perspective on how policy coordination fosters stability and inclusive growth in transitioning democracies. For policymakers, formulating coordinated macroprudential and fiscal policies through prudent spending, service sector investment and the time-varying CAPB would foster employment, enhance resilience, and promote sustainable growth in newly democratized economies by balancing stability and expansion.