DATA/METHODS: The relatively recent Autoregressive Distributed Lag (ARDL) Bounds Test approach to cointegration based on Unrestricted Error Correction Model (UECM) estimation (Pesaran et al. (2001)) is employed for the analysis.
RESULTS: We find that there is a long-run relationship between government expenditure and economic growth such that, in all cases but two, government expenditure grows at a less than proportionate rate than the economy. Further, we find that the countries differ greatly in their speed of adjustment of government expenditure to long run equilibrium following shock to economic growth. The speed of adjustment ranges from less than 2 years to 5 years. Moreover, for 16 countries we find unidirectional causality from expenditure to economic growth in line with the Keynesian view. For another group of 10 countries, causality runs from economic growth to expenditure growth consistent with “Wagner law”. For another group of four countries we find bidirectional causality between expenditure and economic growth. Overall, we find that the baseline results are robust with respect to alternative definitions of the variables.