Government Expenditure and Economic Growth in the EU: Long-Run Tendencies and Short-Term Adjustment
European Economy Economic Papers No. 300
52 Pages Posted: 26 Feb 2008
Date Written: February 2008
This paper analyses both the long and the short-run relation between government expenditure and potential output in EU countries by means of pooled mean group estimation (Pesaran, Shin, and Smith (1999)). Results show that, over a sample comprising EU-15 countries over the 1970-2003 period, it cannot be rejected the hypothesis of a common long-term elasticity between cyclically-adjusted primary expenditure and potential output close to unity. However, the long-run elasticity decreased considerably over the decades and is significantly higher than unity in catching-up countries, in fast-ageing countries, in low-debt countries, and in countries with weak numerical rules for the control of government spending. The average speed of adjustment of government expenditure to its long-tem relation is 3 years, but there are significant differences across countries. Anglo-Saxon and Nordic countries exhibit in general a faster adjustment process, while adjustment in Southern European countries appears somehow slower.
Keywords: Government expenditure, Wagner's law, panel cointegration
JEL Classification: E62, H50, C23
Suggested Citation: Suggested Citation