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Wagner on government spending and national income: A new look at an old relationship

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  • Irandoust, Manuchehr

Abstract

The validity of “augmented” Wagner’s Law is evaluated using a sample of twelve OECD countries over the period of 1995–2015. The bootstrap panel Granger causality approach is utilized to detect the direction of causality between government spending and GDP, focusing on cross-sectional dependence, slope heterogeneity, and structural breaks. The results show a causal relationship in favor of Wagner’s Law in seven countries, thus GDP is long-run forcing to government expenditures and that the causality runs from the former to the latter variable. The policy implication of the findings is that the upholding of Wagner’s Law in the presence of aging population growth and increasing demand for welfare services may force policy makers to raise taxes or it leads to excessive borrowing which might affect sustainability of public finances.

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  • Irandoust, Manuchehr, 2019. "Wagner on government spending and national income: A new look at an old relationship," Journal of Policy Modeling, Elsevier, vol. 41(4), pages 636-646.
    • Handle: RePEc:eee:jpolmo:v:41:y:2019:i:4:p:636-646
    DOI: 10.1016/j.jpolmod.2019.02.003
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    More about this item

    Keywords

    Government spending; Public sector; Wagner’s Law; National income; Causality;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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