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Government expenditure and economic growth: Evidence from trivariate causality testing

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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.

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  • John Loizides & George Vamvoukas, 2005. "Government expenditure and economic growth: Evidence from trivariate causality testing," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 125-152, May.
    • Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:125-152
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    More about this item

    Keywords

    public sector growth; economic growth; bivariate and trivariate causality tests; error correction modeling;
    All these keywords.

    JEL classification:

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

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