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Government expenditure and economic growth: Evidence from trivariate causality testing

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Abstract

This paper seeks to examine if the relative size of government (measured as the share of total expenditure in GNP can be determined to Granger cause the rate of economic growth, or if the rate of economic growth can be determined to Granger cause the relative size of government. For this purpose, we first use a bivariate error correction model within a Granger causality framework, as well as adding unemployment and inflation (separately) as explanatory variables, creating a simple ‘trivariate’ analysis for each of these two variables. The combined analysis of bivariate and trivariate tests offers a rich menu of possible causal patterns. Using data on Greece, UK and Ireland, the analysis shows: i) government size Granger causes economic growth in all countries of the sample in the short run and in the long run for Ireland and the UK; ii) economic growth Granger causes increases in the relative size of government in Greece, and, when inflation is included, in the UK.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VIII (2005)
Issue (Month): (May)
Pages: 125-152

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Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:125-152

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Related research

Keywords: public sector growth; economic growth; bivariate and trivariate causality tests; error correction modeling;

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  1. Abrams, Burton A, 1999. " The Effect of Government Size on the Unemployment Rate," Public Choice, Springer, Springer, vol. 99(3-4), pages 395-401, June.
  2. Razzolini, Laura & Shughart, William F, II, 1997. " On the (Relative) Unimportance of a Balanced Budget," Public Choice, Springer, Springer, vol. 90(1-4), pages 215-33, March.
  3. Singh, Balvir & Sahni, Balbir S, 1984. "Causality between Public Expenditure and National Income," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 66(4), pages 630-44, November.
  4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  5. Todd E. Clark, 1993. "Cross-country evidence on long run growth and inflation," Research Working Paper, Federal Reserve Bank of Kansas City 93-05, Federal Reserve Bank of Kansas City.
  6. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, Elsevier, vol. 39(1-2), pages 199-211.
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