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Government Expenditure and Economic Growth: Evidence from Trivariate Causality Testing

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  • Loizides, John
  • Vamvoukas, George

Abstract

This paper seeks to examine if the relative size of government (measured as the share of total expenditure in GNP can be determined to Granger cause the rate of economic growth, or if the rate of economic growth can be determined to Granger cause the relative size of government. For this purpose, we first use a bivariate error correction model within a Granger causality framework, as well as adding unemployment and inflation (separately) as explanatory variables, creating a simple ‘trivariate’ analysis for each of these two variables. The combined analysis of bivariate and trivariate tests offers a rich menu of possible causal patterns. Using data on Greece, UK and Ireland, the analysis shows: i) government size Granger causes economic growth in all countries of the sample in the short run and in the long run for Ireland and the UK; ii) economic growth Granger causes increases in the relative size of government in Greece, and, when inflation is included, in the UK.

Suggested Citation

  • Loizides, John & Vamvoukas, George, 2005. "Government Expenditure and Economic Growth: Evidence from Trivariate Causality Testing," Journal of Applied Economics, Universidad del CEMA, vol. 8(1), pages 1-28, May.
  • Handle: RePEc:ags:jaecon:37515
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    References listed on IDEAS

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    1. Ram, Rati, 1987. "Wagner's Hypothesis in Time-Series and Cross-section Perspectives:," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 194-204, May.
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    5. Bharat Kolluri & Michael Panik & Mahmoud Wahab, 2000. "Government expenditure and economic growth: evidence from G7 countries," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1059-1068.
    6. Richard Burdekin & Thomas Goodwin & Suyono Salamun & Thomas Willett, 1994. "The effects of inflation on economic growth in industrial and developing countries: is there a difference?," Applied Economics Letters, Taylor & Francis Journals, vol. 1(10), pages 175-177.
    7. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
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    9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    10. Singh, Balvir & Sahni, Balbir S, 1984. "Causality between Public Expenditure and National Income," The Review of Economics and Statistics, MIT Press, vol. 66(4), pages 630-644, November.
    11. Ganti, Subrahmanyam & Kolluri, Bharat R, 1979. "Wagner's Law of Public Expenditures: Some Efficient Results for the United States," Public Finance = Finances publiques, , vol. 34(2), pages 225-233.
    12. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    13. Ram, Rati, 1986. "Government Size and Economic Growth: A New Framework and Some Evidencefrom Cross-Section and Time-Series Data," American Economic Review, American Economic Association, vol. 76(1), pages 191-203, March.
    14. Michael Chletsos & Christos Kollias, 1997. "Testing Wagner's law using disaggregated public expenditure data in the case of Greece: 1958-93," Applied Economics, Taylor & Francis Journals, vol. 29(3), pages 371-377.
    15. Abrams, Burton A, 1999. "The Effect of Government Size on the Unemployment Rate," Public Choice, Springer, vol. 99(3-4), pages 395-401, June.
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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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