Government Expenditure and Economic Growth in the EU: Long-Run Tendencies and Short-Term Adjustment

46 Pages Posted: 14 Feb 2012

See all articles by Alfonso Arpaia

Alfonso Arpaia

European Commission, Directorate General for Economic and Financial Affairs

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 29, 2007

Abstract

This paper analyses the both the long and the short-run relation between government expenditure and potential output in EU countries. Having a satisfactory measurement of these relations has relevant implications for policy. From a long-term perspective, it improves the understanding of the links between output growth and public finances sustainability. Over a medium-to-short run horizon, it provides a benchmark to evaluate the stance of expenditure policy. In the analysis, the panel dimension of the data set is exploited in such a way: (i) to improve the power of statistical tests for the analysis of the dynamic properties of macroeconomic series through panel unit root and panel co-integration tests; (ii) to obtain country-specific information on adjustment dynamics by means of pooled mean group estimation. 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. The long-run elasticity is however not stable over time (it decreased considerably over the decades) and is significantly higher than unity in catching-up countries, in fast-aging 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-term 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

Arpaia, Alfonso and Turrini, Alessandro, Government Expenditure and Economic Growth in the EU: Long-Run Tendencies and Short-Term Adjustment (March 29, 2007). Available at SSRN: https://ssrn.com/abstract=2004461 or http://dx.doi.org/10.2139/ssrn.2004461

Alfonso Arpaia (Contact Author)

European Commission, Directorate General for Economic and Financial Affairs ( email )

BU-1 05/190
Brussels, Bruxelles B-1049
Belgium

HOME PAGE: http://europa.eu.int/comm/economy_finance/index_en.htm

Alessandro Turrini

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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