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Government expenditure and economic growth: Evidence from trivariate causality testing

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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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VIII (2005)
Issue (Month): (May)
Pages: 125-152

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Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:125-152
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  1. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
  2. Abrams, Burton A, 1999. " The Effect of Government Size on the Unemployment Rate," Public Choice, Springer, vol. 99(3-4), pages 395-401, June.
  3. Razzolini, Laura & Shughart, William F, II, 1997. " On the (Relative) Unimportance of a Balanced Budget," Public Choice, Springer, vol. 90(1-4), pages 215-33, March.
  4. Clark, Todd E, 1997. "Cross-country Evidence on Long-Run Growth and Inflation," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 70-81, January.
  5. 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 630-44, November.
  6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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