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Government Expenditures And Revenues Causation: Some Caribbean Empirical Evidence

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  • GHARTEY, Edward E.

Abstract

Error-correction model and stepwise Granger causality technique are used to examine the long-run and short-term causal relationships between taxes and spending to determine the effective way of reducing deficit and debt problems in four Caribbean countries with bicameral legislatures. Granger's temporal causality test confirms that taxes cause spending for only Belize, and independent for the rest of the countries. Estimates of the error correction model show long-run bi-directional causation in The Bahamas, Barbados and Belize, and independent in Jamaica. Tax limitation is the optimal policy for controlling deficit and debt problems over the short-term for only Belize, although in the long-run the Bahamas, Barbados and Belize have flexibility in balancing their budget because their ruling parties closely control budgetary and tax initiatives. In Jamaica taxes and spending are independent even though the minister of finance controls both; so eliminating inter party rivalry will assist in balancing the country’s national budget.

Suggested Citation

  • GHARTEY, Edward E., 2010. "Government Expenditures And Revenues Causation: Some Caribbean Empirical Evidence," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(2).
    • Handle: RePEc:eaa:aeinde:v:10:y:2010:i:2_12
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    More about this item

    Keywords

    Government spending; tax revenues; Granger causality; error correction model; Caribbean.;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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