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Causality Between Taxes and Expenditures in the U.S.: A Multivariate Approach

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  • Benjamin S. Cheng
  • Ashagre Yigletu
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    Abstract

    Applying Hsiao's version of the Granger causality method, this paper reexamines the causality between nominal expenditures and revenues in the United States for the 1946-96 period in a multivariate framework. Both the Engle-Granger two-step and Johansen canonical cointegration tests are performed. This study finds that taxes, spending, and GDP are cointegrated. While this study detects no evidence of causality between revenues and expenditures, it is found that income causes both revenues and expenditures in the Granger sense in the United States.

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    Bibliographic Info

    Article provided by New York State Economics Association (NYSEA) in its journal New York Economic Review.

    Volume (Year): 31 (2000)
    Issue (Month): 1 ()
    Pages: 15-26

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    Handle: RePEc:nye:nyervw:v:31:y:2000:i:1:p:15-26

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    1. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers 28-89, Wharton School Rodney L. White Center for Financial Research.
    2. Lutkepohl, Helmut, 1982. "Non-causality due to omitted variables," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 367-378, August.
    3. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
    4. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    5. Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-54, May.
    6. Oluwole Owoye, 1995. "The causal relationship between taxes and expenditures in the G7 countries: cointegration and error-correction models," Applied Economics Letters, Taylor & Francis Journals, vol. 2(1), pages 19-22.
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    8. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 3-91, Wharton School Rodney L. White Center for Financial Research.
    9. Caines, P. E. & Keng, C. W. & Sethi, S. P., 1981. "Causality analysis and multivariate Autoregressive modelling with an application to supermarket sales analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 3(1), pages 267-298, November.
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    13. Serletis, Apostolos, 1988. "The Empirical Relationship between Money, Prices, and Income Revisite d," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 351-58, July.
    14. Lee, Dwight R & Vedder, Richard K, 1992. "Friedman Tax Cuts vs. Buchanan Deficit Reduction as the Best Way of Constraining Government," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 722-32, October.
    15. Joulfaian, David & Mookerjee, Rajen, 1990. "The Intertemporal Relationship between State and Local Government Revenues and Expenditures: Evidence from OECD Countries," Public Finance = Finances publiques, , vol. 45(1), pages 109-17.
    16. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    17. Darrat, Ali F. & Osman Suliman, M., 1994. "Volatility of money growth and the U.S. velocity puzzle: Some further results," Journal of Economics and Business, Elsevier, vol. 46(2), pages 77-88, May.
    18. Jones, Jonathan D. & Joulfaian, David, 1991. "Federal govemment expenditures and revenues in the early years of the American republic: Evidence from 1792 to 1860," Journal of Macroeconomics, Elsevier, vol. 13(1), pages 133-155.
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