Does government size moderate finance-growth nexus in Sub-Saharan Africa?

We ask how government size impacts the relationship between financial development and economic growth for Sub-Saharan African countries during 1980-2014 period. The empirical strategy relies on panel data techniques of panel smooth transition regression (PSTR) and dynamic GMM approaches to test for non-linearities in finance-growth nexus and endogenously model the non-linearity to depend on government size. Preliminary results from the dynamic panel model show that finance-growth nexus is non-linear. Upon delving further into the non-linearities, our results show that financial development impacts economic growth positively only beyond a necessary threshold level of government expenditure share of 12 percent of GDP. Given the large informal sector and the pervasive market failures in Sub Saharan African economies, governments need a minimum threshold level of expenditure to “correct” the credit markets and “formalize” the large informal financial sector. Therefore, Sub-Saharan African countries should not shy away from government expenditures that are meant to “correct” market failures in the financial sector or “formalize” the large informal financial sector to make finance work for economic growth.