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The Intertemporal Relation Between Government Revenue and Expenditure in the United Kingdom, 1750-2004

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  • Lusine Lusinyan

    (International Monetary Fund)

  • John Thornton

    ()
    (Bangor University)

Abstract

We examine the intertemporal relation between government revenue and expenditure in the UK during 1750–2004. We pay particular attention to long-run trends by applying a battery of unit root and cointegration techniques to the data, and we use a modified Granger-causality test on data spans organized around structural breaks in the series. The results suggest that, allowing for structural breaks, UK real revenue and spending are I(1) series and cointegrated and that Granger-causality runs from government spending to revenue. As such, the ‘spend-tax’ hypothesis appears to best characterize the long-run intertemporal relation between government revenue and spending in the UK.

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Bibliographic Info

Paper provided by Bangor Business School, Prifysgol Bangor University (Cymru / Wales) in its series Working Papers with number 10007.

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Length: 28 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:bng:wpaper:10007

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Related research

Keywords: Government revenue and expenditure; Unit roots; Cointegration; Causality; Structural breaks;

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References

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  1. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 944, Cowles Foundation for Research in Economics, Yale University.
  2. Lütkepohl, Helmut & Saikkonen, Pentti & Trenkler, Carsten, 2000. "Comparison of tests for the cointegrating rank of a VAR process with a structural shift," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2000,10, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 99-126, January.
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  5. Tsangyao Chang & Wen Rong Liu & Steven Caudill, 2002. "Tax-and-spend, spend-and-tax, or fiscal synchronization: new evidence for ten countries," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 34(12), pages 1553-1561.
  6. Barro, Robert J., 1987. "Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701-1918," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 221-247, September.
  7. Thierno Balde & Gabriel Rodriguez, 2005. "Finite sample effects of additive outliers on the Granger-causality test with an application to money growth and inflation in Peru," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(13), pages 841-844.
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