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The Effect of Federal Government Size on Long-Term Economic Growth in the United States, 1792-2004

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  • Federico Guerrero

    ()
    (Department of Economics, University of Nevada, Reno)

  • Elliott Parker

    ()
    (Department of Economics, University of Nevada, Reno)

Abstract

In this paper, we consider whether there is statistical evidence for a causal relationship between federal government expenditures and growth in real per-capita GDP in the United States, using available data going back to 1792. After studying the time-series properties of these variables for stationarity and cointegration, we investigate Granger causality in detail in the context of a Vector Error Correction Model. While we find causal evidence supporting Wagner’s Law, we find no evidence supporting the common assertion that a larger government sector leads to slower economic growth.

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File URL: http://www.business.unr.edu/econ/wp/papers/UNRECONWP07002.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics in its series Working Papers with number 07-002.

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Length: 34 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:unr:wpaper:07-002

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Keywords: long-term economic growth; federal government size; Wagner’s Law; United States; cointegration; Granger causality; vector autoregression; vector error correction model;

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References

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  1. Eric M. Engen & Jonathan Skinner, 1996. "Taxation and Economic Growth," NBER Working Papers 5826, National Bureau of Economic Research, Inc.
  2. Zellner, Arnold, 1988. "Causality and causal laws in economics," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 7-21.
  3. Peacock, Alan & Scott, Alex, 2000. " The Curious Attraction of Wagner's Law," Public Choice, Springer, vol. 102(1-2), pages 1-17, January.
  4. Safa Demirbas, 1999. "Cointegration Analysis-Causality Testing and Wagner's Law The Case of Turkey, 1950-1990," Discussion Papers in Economics 99/3, Department of Economics, University of Leicester.
  5. Nelson, C-R & Murray, C-J, 1997. "The Uncertain Trend in U.S. GDP," Working Papers 97-05, University of Washington, Department of Economics.
  6. Conte, Michael A & Darrat, Ali F, 1988. "Economic Growth and the Expanding Public Sector: A Reexamination," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 322-30, May.
  7. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  8. Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
  9. Hendry, David F, 1986. "Using PC-GIVE in Econometrics Teaching," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(1), pages 87-98, February.
  10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  11. 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.
  12. Gilbert, Christopher L, 1986. "Professor Hendry's Econometric Methodology," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 283-307, August.
  13. Thomas A. Garrett & Russell M. Rhine, 2006. "On the size and growth of government," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 13-30.
  14. Anisul Islam, 2001. "Wagner's law revisited: cointegration and exogeneity tests for the USA," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 509-515.
  15. Jacques Poot, 2000. "A Synthesis of Empirical Research on the Impact of Government onLong-Run Growth," Growth and Change, Gatton College of Business and Economics, University of Kentucky, vol. 31(4), pages 516-546.
  16. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
  17. Peter M. Jackson & Meryem Duygun Fethi & Sami Fethi, . "Cointegration, Causality and Wagner's Law: A test for Northern Cyprus, 1977-1996," Discussion Papers in Public Sector Economics 99/2, Department of Economics, University of Leicester.
  18. Guseh, James S., 1997. "Government Size and Economic Growth in Developing Countries: A Political-Economy Framework," Journal of Macroeconomics, Elsevier, vol. 19(1), pages 175-192, January.
  19. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
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