Inflation versus Public Expenditure Growth in the U.S.: An Empirical Investigation

Abstract

This paper investigates the relationship between public expenditure growth and inflation in the United States of America using the co-integration analysis and Granger Causality Model applied to Time Series Annual Data from 1970-2002. The results indicate that public expenditure and inflation are co-integrated and thus there exist a long-run equilibrium relation between the two variables. There is also a bi-causational relationship between public expenditure growth and inflation in the United States of America. Inflation significantly influences public expenditure decisions in the United States of America. Public expenditure growth was seen to aggravate inflationary pressures in the country, where reduction in public expenditure tends to reduce inflation. Thus, as in previous studies, the efficacy of Keynesian's fiscal policy as a veritable tool to combating inflation in the developed countries is not falsified

Keywords: Public Expenditure, Inflation, Developing Economies

JEL Classification: E31, E62, H5, H59