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Testing threshold cointegration in Wagner's Law: the role of military spending

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  • Maddalena Cavicchioli
  • Barbara Pistoresi

Abstract

This paper uses historical data since mid-19th century to test the validity of Wagner's Law for the Italian economy. Unlike the previous studies, we accommodate possible nonlinear asymmetric e.ects of total gov- erment spending and GDP toward their long-run equilibrium. Our results show the presence of a threshold cointegrating relationship between the two variables with signi.cantly di.erent error correction adjustments in normal and extreme regimes. Particularly, we .nd the validity of Wagner's Law from 1862 to 2009, only when we take into account strong nonlinear responses of government spending during the WWI and WWII period. Robustness checks clearly recognize nonlinear behaviour of government expenditure driven by military spending.

Suggested Citation

  • Maddalena Cavicchioli & Barbara Pistoresi, 2016. "Testing threshold cointegration in Wagner's Law: the role of military spending," Department of Economics 0078, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    • Handle: RePEc:mod:depeco:0078
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    Cited by:

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    4. Doré, Natalia I. & Teixeira, Aurora A.C., 2023. "The role of human capital, structural change, and institutional quality on Brazil's economic growth over the last two hundred years (1822–2019)," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 1-12.
    5. Philip Arestis & Hüseyin Şen & Ayşe Kaya, 2021. "On the linkage between government expenditure and output: empirics of the Keynesian view versus Wagner’s law," Economic Change and Restructuring, Springer, vol. 54(2), pages 265-303, May.
    6. Ayad Hicham, 2020. "Government Expenditure and Economic Growth Nexus in Mena Countries: Frequency Domain Spectral Causality Analysis," Economics and Business, Sciendo, vol. 34(1), pages 60-77, January.
    7. Saten Kumar & Zhaoyi Cao, 2020. "Testing for structural changes in the Wagner’s Law for a sample of East Asian countries," Empirical Economics, Springer, vol. 59(4), pages 1959-1976, October.
    8. Funashima, Yoshito & Hiraga, Kazuki, 2016. "Wagner's law, fiscal discipline, and intergovernmental transfer: Empirical evidence at the U.S. and German state levels," MPRA Paper 73551, University Library of Munich, Germany.
    9. Wahyudi Wahyudi, 2020. "The Relationship between Government Spending and Economic Growth Revisited," International Journal of Economics and Financial Issues, Econjournals, vol. 10(6), pages 84-88.
    10. Ebaid Ali & Bahari Zakaria, 2019. "The Nexus between Government Expenditure and Economic Growth: Evidence of the Wagner’s Law in Kuwait," Review of Middle East Economics and Finance, De Gruyter, vol. 15(1), pages 1-9, April.
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    12. Yoshito Funashima & Kazuki Hiraga, 2017. "Wagner’s law, fiscal discipline, and intergovernmental transfer: empirical evidence at the US and German state levels," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 652-677, August.

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    More about this item

    Keywords

    Time series; Nonlinearity; Threshold Cointegration; Threshold Vector Error Correction; Public spending; Economic growth; Wagner's Law;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • H1 - Public Economics - - Structure and Scope of Government
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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