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An investigation of granger causality between tax revenues and government expenditures

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  • Hasan, Syed Akif
  • Subhani, Muhammad Imtiaz
  • Osman, Ms. Amber

Abstract

The nexus between government revenue and government expenditure always wins the attention of policy makers and think tanks while they work four making fiscal policies for an economy. This paper is an empirical investigation on the unidirectional causality between government expenditures and the revenues, which government collects from public in shape of various levied taxes. Annual data for Pakistan from the period of 1979 to 2010 for governmental expenditures and its tax revenue have been collected. While, the unidirectional and bidirectional causality were interrogated via applying Granger causality for the outlined variables. The results indicate that there is an uni-directional causality between the expenditures and revenues, which runs from tax revenues to govt. expenditures, that is the previous lags of tax revenue has a causal impact on the current govt. spending.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35686.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:35686

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Keywords: tax revenue; government expenditure; fiscal policy; granger causality; economy;

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  1. Neelesh Gounder & Paresh Kumar Narayan & Arti Prasad, 2007. "An empirical investigation of the relationship between government revenue and expenditure: The case of the Fiji Islands," International Journal of Social Economics, Emerald Group Publishing, Emerald Group Publishing, vol. 34(3), pages 147-158, March.
  2. Hondroyiannis, George & Papapetrou, Evangelia, 1996. " An Examination of the Causal Relationship between Government Spending and Revenue: A Cointegration Analysis," Public Choice, Springer, Springer, vol. 89(3-4), pages 363-74, December.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Paresh Kumar Narayan & Seema Narayan, 2006. "Government revenue and government expenditure nexus: evidence from developing countries," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(3), pages 285-291.
  5. Baffes, John & Shah, Anwar, 1990. "Taxing choices in deficit reduction," Policy Research Working Paper Series 556, The World Bank.
  6. Alan T. Peacock & Jack Wiseman, 1979. "Approaches To the Analysis of Government Expenditure Growth," Public Finance Review, , , vol. 7(1), pages 3-23, January.
  7. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 914-27, October.
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