This presentation is part of: E60-1 (1888) Monetary and Fiscal Policy

Public Expenditure and Economic Growth: New Evidence from OECD Countries

Olugbenga A. Onafowora, Ph.D., Department of Economics, Susquehanna University, School of Business, Selinsgrove, PA 17870 and Oluwole Owoye, Ph.D., Department of Social Sciences/Economics, Western Connecticut State University, 181 White Street, Danbury, CT 06810.

OBJECTIVE: This paper explores the Wagnerian-Keynesian debate over the direction of the causal relationship between government expenditure and economic growth, in both developed and developing countries by examining the dynamic properties of the relationships between government expenditure and economic growth for 30 OECD countries over the period 1970-2005.

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.