The armey curve: Size of public spending and economic growth in Peru

In this study the relationship between public expenditure and the economic growth rate in Peru is analyzed using data for the period 1984-2017. The main objective is to test whether or not there is an inverted-U relationship between public spending and economic growth, and to determine the optimum level of public spending for Peru. The regression and Armey curve methods are used. The Armey curve shows that there is a positive relationship between public spending and gross domestic product (GDP) until a maximum point is reached, after which GDP decreases as public expenditure increases. The empirical findings show the inverted-U between public expenditure and growth, while the optimal level of public spending as a proportion of GDP is found to be 20.76% for the Peruvian case.