Peacock and Wiseman's Displacement Effect: A Reappraisal and a New Test
20 Pages Posted: 14 Nov 2012
Date Written: January 12, 1990
Although Peacock and Wiseman's "displacement effect" is frequently cited as an explanation of increases in government spending over time, the theory has so far been inadequately tested. In this paper four versions of the hypothesis are identified, and earlier empirical tests are reviewed and found efficient. A new test focusing in the time-series behavior of government spending is developed and tested on data for Sweden and the U.K. The test examines upward displacement after World War II, the only social upheaval which, du to data limitations, allows for a test of displacement. Strong evidence against the hypothesis is found.
Keywords: Government growth, Government expenditure, Displacement effect
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