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Temporal Causality between Taxes and Public Expenditures: The Case of South Africa

Author

Listed:
  • Kasai Ndahiriwe

    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

Abstract

This paper investigates the direction of causal relationship between taxes and expenditure in South Africa, using quarterly data for the period 1960:1-2006:2, and annual data for 1960 to 2005. For both frequencies, gross domestic product and government debt are included in the VAR system as control variables. For quarterly data the Johansen’s (1991, 1995) methodology suggest two cointegrating equations among the four variables. Our findings support the fiscal synchronisation hypothesis, since Granger causality tests in a Vector Error Correction framework suggests bi-directional causality between taxes and expenditure for the period under study. In contrast to the VECM for quarterly data, the VECM for annual data disprove any option of Granger causality between taxes and expenditure. The apparent ambiguity is indication of the fact that causality, among other factors, depends on the frequency of data.

Suggested Citation

  • Kasai Ndahiriwe & Rangan Gupta, 2007. "Temporal Causality between Taxes and Public Expenditures: The Case of South Africa," Working Papers 200709, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:200709
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    Cited by:

    1. Samuel S Jibao & Niek Schoeman & Ruthira Naraidoo, 2010. "Fiscal Regime Changes and the Sustainability of Fiscal Imbalance in South Africa: A Smooth Transition Error-Correction Approach," Working Papers 201023, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Granger causality; Cointegration; Error correction; Vector error correction model; Vector autoregressive model;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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