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The Futile Quest for a Grand Explanation of Long-Run Government Expenditure

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  • Durevall, Dick

    ()
    (School of Business, Economics and Law)

  • Henrekson, Magnus

    ()
    (Research Institute of Industrial Economics (IFN))

Abstract

This paper carries out a critical reappraisal of the two contending theories purporting to explain long-run government spending: Wagner’s Law and different variants of the ratchet effect. We analyze data spanning from the early 19th century until the present day in Sweden and the United Kingdom. Hence, in contrast to previous studies, we evaluate the validity of Wagner’s Law and the ratchet effect hypothesis over a very long time period, starting at the beginning of industrialization. Cointegration analysis is used to investigate the long-run relationships between government expenditure and GDP, focusing on sub-periods and structural breaks. Moreover, we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment. According to our main results, Wagner’s Law does not hold in the long run, although the data are consistent with Wagner’s Law between roughly 1860 and the mid 1970s. This can be traced to the formation of the modern public sector, including the introduction of public education, health care, and so forth. Yet Wagner’s Law did not hold during the initial industrialization phase (before 1860), and in recent periods GDP only affects the government spending share when we control for population age structure. Finally, we find some evidence of asymmetric adjustment in the UK, particularly in the post-WWII period. However, the ratchet effect is not a general cause of the growth of government spending.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 818.

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Length: 41 pages
Date of creation: 02 Jan 2010
Date of revision: 28 Oct 2010
Publication status: Published as Durevall, Dick and Magnus Henrekson, 'The Futile Quest for a Grand Explanation of Long-Run Government Expenditure' in Journal of Public Economics, 2011, pages 708-722.
Handle: RePEc:hhs:iuiwop:0818

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Keywords: Displacement effect; Government expenditure; Growth of government; Public sector; Ratchet effect; Wagner’s Law;

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Citations

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Cited by:
  1. Bergh, Andreas & Henrekson, Magnus, 2011. "Government Size and Growth: A Survey and Interpretation of the Evidence," Working Paper Series 858, Research Institute of Industrial Economics.
  2. Brückner, Markus & Chong, Alberto & Gradstein, Mark, 2012. "Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks," Journal of Public Economics, Elsevier, vol. 96(11), pages 1025-1035.
  3. Brückner, Markus & Chong, Alberto & Gradstein, Mark, 2011. "Estimating Income Elasticity of Government Expenditures: Evidence from Oil Price Shocks," CEPR Discussion Papers 8563, C.E.P.R. Discussion Papers.
  4. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.
  5. Arze del Granado, F. Javier & Martinez-Vazquez, Jorge & McNab, Robert M., 2012. "Decentralized Governance and Preferences for Public Goods," MPRA Paper 42459, University Library of Munich, Germany.
  6. Makkonen, Teemu, 2013. "Government science and technology budgets in times of crisis," Research Policy, Elsevier, vol. 42(3), pages 817-822.
  7. Stephen Kirchner, 2010. "Federal Legislative Activism in Australia: A New Approach to Testing Wagner's Law," Working Paper Series 161, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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