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Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks

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  • Brückner, Markus
  • Chong, Alberto
  • Gradstein, Mark

Abstract

This paper provides instrumental variable estimates of the permanent income elasticity of government expenditures. It uses annual variation in the international oil price weighted with countries' average oil net-export GDP shares as a plausibly exogenous source of within-country variation in countries’ permanent income. The short-run estimates of the permanent income elasticity are robust across alternative specifications and are below one: the estimated elasticity coefficients range between 0.3 and 0.6 and have standard errors of 0.1 and 0.4, respectively. Point estimates of long-run elasticities are somewhat larger but still smaller than unity. The investment component of government spending is found to be more elastic than the consumption component, whereas elasticity differences between rich and poor countries are insignificant.

Suggested Citation

  • Brückner, Markus & Chong, Alberto & Gradstein, Mark, 2012. "Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks," Journal of Public Economics, Elsevier, vol. 96(11), pages 1025-1035.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:1025-1035 DOI: 10.1016/j.jpubeco.2012.08.002
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    Citations

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    Cited by:

    1. Markus Brueckner & Hannes Schwandt, 2015. "Income and Population Growth," Economic Journal, Royal Economic Society, vol. 125(589), pages 1653-1676, December.
    2. António Afonso & José Alves, 2017. "Reconsidering Wagner’s law: evidence from the functions of the government," Applied Economics Letters, Taylor & Francis Journals, pages 346-350.
    3. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9433-4 is not listed on IDEAS
    4. Markus Brueckner & Tomoo Kikuchi & George Vachadze, 2016. "Effects of Income Growth on Domestic Saving Rates: The Role of Poverty and Borrowing Constraints," ANU Working Papers in Economics and Econometrics 2016-636, Australian National University, College of Business and Economics, School of Economics.
    5. Markus Brueckner & Era Dabla Norris & Mark Gradstein, 2015. "National income and its distribution," Journal of Economic Growth, Springer, vol. 20(2), pages 149-175, June.
    6. Funashima, Yoshito, 2015. "Wagner's law versus displacement effect," MPRA Paper 68390, University Library of Munich, Germany.
    7. Eiji Fujii, 2017. "Government Size, Trade Openness, and Output Volatility: A Case of fully Integrated Economies," Open Economies Review, Springer, vol. 28(4), pages 661-684, September.

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