Estimating Income Elasticity of Government Expenditures: Evidence from Oil Price Shocks

39 Pages Posted: 16 Sep 2011

See all articles by Markus Bruckner

Markus Bruckner

University of Adelaide

Alberto Chong

University of Ottawa

Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); World Bank - Development Research Group (DECRG)

Date Written: September 2011

Abstract

We estimate the income elasticity of government expenditures using variation in the international oil price as a plausibly exogenous source of within-country variation of countries' permanent income. Our short run elasticity estimates, between 0.25-0.50, are generally somewhat smaller than the previously obtained ones, and they, in particular, indicate that Wagner's law does not hold; long run elasticities are larger, but still smaller than unity. We also explore the correlates of the income elasticity of government spending and find no support for views that either democracy, inequality, or openness are associated with a larger elasticity. However, we find evidence consistent with "voracity" theories: cross-country differences in ethnic polarization are associated with a significantly higher oil price driven income elasticity of government spending.

Keywords: Wagner law

JEL Classification: H1

Suggested Citation

Bruckner, Markus and Chong, Alberto and Gradstein, Mark, Estimating Income Elasticity of Government Expenditures: Evidence from Oil Price Shocks (September 2011). CEPR Discussion Paper No. DP8563, Available at SSRN: https://ssrn.com/abstract=1928446

Markus Bruckner (Contact Author)

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

Alberto Chong

University of Ottawa ( email )

2292 Edwin Crescent
Ottawa, Ontario K2C 1H7
Canada

Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+97 2 8647 2288 (Phone)
+97 2 8647 2941 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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