Wagner’s Law and the Dynamics of Government Spending in Indonesia

Purpose The purpose of this paper is to assess the responses of different categories of government spending to changes in economic activity. In other words, the authors empirically revisit the validation of the Wagner’s law in a sample of 61 advanced and emerging market economies between 1995 and 2015. Design/methodology/approach The authors do so via panel data instrumental variables and time-series SUR approaches. Findings Evidence from panel data analyses show that the Wagner’s law seems more prevalent in advanced economies and when countries are growing above potential. However, such result depends on the government spending category under scrutiny and the functional form used. Country-specific analysis revealed relatively more cases satisfying Wagner’s proposition within the emerging markets sample. The authors also found evidence of counter-cyclicality in several spending items. All in all, the Wagner’s regularity seems more the exception than the norm. Originality/value While in the literature on the size of the public sector with respect to a country’s level of economic development has received much attention, the authors make several novel contributions: since some economists criticized Wagner’s law because of ambiguity of the measurement of government expenditure (Musgrave, 1969), instead of looking at aggregate public expenditures, the authors go much more granular into the different functions of government (to this end, the authors use the Classification of Functions of the Government nomenclature). The authors check the validity of the Law via an instrumental variable approach in a panel setting; after that, the authors take into account the phase of the business cycle using a new filtering technique to compute potential GDP (output gap); then, the authors cross-check the baseline results by considering alternative functional form specifications of the Law; and finally, the authors look at individual countries one at the time via SUR analysis.

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THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND GOVERNMENT SPENDING: A CASE STUDY OF OIC COUNTRIES

Jurnal Ekonomi Pembangunan Kajian Masalah Ekonomi dan Pembangunan ◽

10.23917/jep.v11i2.322 ◽

2015 ◽

Vol 11 (2) ◽

pp. 149 ◽

Cited By ~ 1

Author(s):

Heri Sudarsono

Keyword(s):

Economic Growth ◽

Government Spending ◽

Time Series Data ◽

Series Data ◽

Causality Test ◽

Wagner’S Law ◽

The Public ◽

Wagner's Law ◽

The Relationship

This paper presents the results for testing for causal relationship between economic growth and goverment spending for OIC countries covering the time series data 1970~2006. There are usually two propositions regarding the relation between economic growth and government spending: Wagner’s Law states that as GDP grows, the public sector tends to grow; and the Keynesian framework postulates that public expenditure causes GDP to grow. The primary strength and originality of this paper is that we used aggregate data as well as disaggregate data for Granger causality test. By testing for causality between economic growth and government spending, we find that government spending does cause economic growth in Iran, Nigeria and Tunisia, which are compatible with Keynesian’s theory. However, the economic growth does cause the increase in goverment spending in Algeria, Burkina Faso, Benin, Indonesia, Libya Malaysia, Marocco, and Saudi, which are well-suited with Wagner’s law.

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The Nexus between Government Expenditure and Economic Growth: Evidence of the Wagner’s Law in Kuwait

Review of Middle East Economics and Finance ◽

10.1515/rmeef-2017-0001 ◽

2019 ◽

Vol 15 (1) ◽

Cited By ~ 2

Author(s):

Ali Ebaid ◽

Zakaria Bahari

Keyword(s):

Economic Growth ◽

Government Spending ◽

Time Series Data ◽

Government Expenditure ◽

Policy Instrument ◽

Series Data ◽

Causality Test ◽

Wagner’S Law ◽

Per Capita ◽

Wagner's Law

Abstract This study is the first attempt to examine the validity of the Wagner’s law hypothesis by employing time-series data over the period from 1970 to 2015 in Kuwait. In this paper, the causal relationship between government expenditure and economic growth is tested by conducting the Granger non-causality test developed by (Toda, H. Y., and T. Yamamoto. 1995. “Statistical Inference in Vector Autoregressions with Possibly Integrated Processes.” Journal of Econometrics 66 (1): 225–250.) and (Dolado, J. J., and H. Lütkepohl. 1996. “Making Wald Tests Work for Cointegrated VAR Systems.” Econometric Reviews 15 (4): 369–386.). The empirical results support the unidirectional causality running from government spending to economic growth. This occurs only when real government expenditure per capita is a proxy for state activity and real gross domestic product (GDP) per capita is a measure of economic growth. This implies that Wagner’s law does not apply for Kuwait’s economy, and the Keynesian proposition of government spending as a policy instrument that encourages and leads economic growth is supported by the data used.

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The Parallel Link Between Economic Growth and the Growth of Government Spending: Wagner’s Law Visited for Liberia: A Vector Error Correction Methodology

International Journal of Business and Economics Research ◽

10.11648/j.ijber.20200906.12 ◽

2020 ◽

Vol 9 (6) ◽

pp. 375

Author(s):

Lester Zomatic Tenny

Keyword(s):

Economic Growth ◽

Error Correction ◽

Government Spending ◽

Vector Error Correction ◽

Wagner’S Law ◽

Vector Error ◽

Parallel Link ◽

Wagner's Law

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Public spending and Wagner’s law in Central and Eastern European countries

Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis ◽

10.11118/actaun201260020383 ◽

2012 ◽

Vol 60 (2) ◽

pp. 383-390 ◽

Cited By ~ 1

Author(s):

Irena Szarowská

Keyword(s):

Government Spending ◽

European Countries ◽

Annual Data ◽

Eastern European ◽

Wagner’S Law ◽

Average Value ◽

Wagner's Law ◽

The Government ◽

Eastern European Countries

This paper provides direct empirical evidence on cyclicality and the long-term and short-term relationship between government spending and output in eight Central and Eastern European countries in a period 1995–2009. We analyzed annual data on government spending in compliance with the COFOG international standard. Although the theory implies that government spending is countercyclical, our research does not prove that. The results confirm cyclical development of government spending on GDP, Wagner’s law and voracity effect in the CEE countries during 1995–2009. We used Johansen cointegration test and the error correction model. Output and government spending are cointegrated for at least 4 from 10 spending functions in every country and it implies a long-term relationship between government spending and output. The government spending functions are procyclical in most CEE countries (93% cases in the sample). Average value of long-run elasticity coefficient is 1.74 for all spending functions, 1.02 for total government spending. We also analyzed the short-run relationship between spending and output. The coefficient values (average is 2.89) confirm the voracity hypothesis, as they suggest that in response to a given shock to real GDP, government spending rises by even more in percentage points.

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