A re-examination of Wagner's Law using US total state and local expenditure and its sub-categories
Purpose - This paper seeks to examine the validity of Wagner's Law using annual data (1957-2006) for the US state-local government (SLG) real expenditure and eight of its sub-categories. Design/methodology/approach - The co-integration tests of Johansen and the bounds testing approach to co-integration proposed by Pesaran Findings - Most SLG expenditure variables were found to be non-stationary and income-elastic. However, with the exception of total expenditure (te), insurance trust benefits (ins) and social services and income maintenance (ssim), no other non-stationary expenditure variable was co-integrated with pcgdp and error-corrected over time. The ECM results suggested that te, ins and ssim were driven by pcgdp, consistent with a Wagnerian causal ordering. The Toda-Yamamoto approach, however, indicated that in these and a few other cases the causal effect was bidirectional. Originality/value - This paper provides a fairly comprehensive test of Wagner's Law at the US sub-national government level with an emphasis on the concepts of co-integration and (long-run) causality in the income-expenditure nexus. Its findings underscore the importance of using disaggregated expenditure measures to test Wagner's Law, as they suggest that some, but not all, rapidly growing and non-stationary expenditure sub-categories were decoupled from pcgdp in the long run.
Volume (Year): 38 (2011)
Issue (Month): 4 (September)
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