Further Evidence on the Causal Relationship between Government Spending and Economic Growth: The Case of Greece, 1958-2004

Abstract

The purpose of this paper is the empirical testing of the relationship between economic growth and government spending and, at the same time, to determine the extent to which economic growth causes growth in government expenditures (Wagner’s law) or the other way around (Keynesian hypothesis). The econometric analysis, using data for the Greek economy covering the period 1958–2004 and based on recent developments in the theory of cointegrated processes, reveals a long-run equilibrium relationship between government expenditures and economic output. Furthermore, the analysis detects causal effects in both the short-run and long-run horizon running from government expenditures to the level of economic activity and vice versa.

Keywords: Wagner’s Law, Economic Growth, Cointegration, ARDL, Greece

JEL Classification: H50, H89, C12, C22, E6, O40