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On the Causal Relationship between Government Expenditures and National Income


  • Holmes, James M
  • Hutton, Patricia A


A research strategy is suggested that separates the issue of inference from the problems of prediction or of quantitative policy analysis of an empirical parametric model and illustrates a new methodology that enables this in a test for prima facie causality. Unlike the conventional parametric test, the more powerful multiple rank F test is invariant to monotonic transformations of the variables and independent of the error distribution. Employing this test, the Wagnerian hypothesis, supported by conventional parametric analysis, is rejected and the conventional Keynesian theory is accepted. Copyright 1990 by MIT Press.

Suggested Citation

  • Holmes, James M & Hutton, Patricia A, 1990. "On the Causal Relationship between Government Expenditures and National Income," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 87-95, February.
  • Handle: RePEc:tpr:restat:v:72:y:1990:i:1:p:87-95

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    References listed on IDEAS

    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Fair, Ray C, 1978. "The Sensitivity of Fiscal Policy Effects to Assumptions about the Behavior of the Federal Reserve," Econometrica, Econometric Society, vol. 46(5), pages 1165-1179, September.
    3. Robert B. Litterman, 1979. "Techniques of forecasting using vector autoregressions," Working Papers 115, Federal Reserve Bank of Minneapolis.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Hendry, David F. & Richard, Jean-Francois, 1982. "On the formulation of empirical models in dynamic econometrics," Journal of Econometrics, Elsevier, vol. 20(1), pages 3-33, October.
    6. White, Halbert & Domowitz, Ian, 1984. "Nonlinear Regression with Dependent Observations," Econometrica, Econometric Society, vol. 52(1), pages 143-161, January.
    7. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, vol. 21(3), pages 333-355, April.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    9. Stephen K. McNees, 1986. "The accuracy of two forecasting techniques: some evidence and an interpretation," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 20-31.
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