RE-EXAMINATION OF WAGNER’S LAW FOR OECD COUNTRIES

Abstract

This paper investigates the relationship between government spending and economic growth. Economictheory generally expects a negative relationship between these variables for rich countries with large public sectors.However, empirical studies often cannot find a robust negative relationship and have provided mixed empiricalevidence. In the case of the relationship between public expenditure and economic growth it appears thatspecification of econometric methods, data selection and time span could affect the findings and lead to contradictoryconclusions. This paper utilizes a panel of cross-sectional and time series data for 16 OECD countries over the 1995-2010 periods to reexamine the relationship between government spending and economic growth by conductingeconometric panel study. We investigate the unit root properties and cointegration, long-run economic relationship,between government expenditure and economic growth to test the validity of Wagner’s Law. Our findings indicate thatgovernment spending exerts a positive and significant influence on economic growth and provide evidence for thevalidity of Wagner’s law.

Keywords

• Government expenditure
• Economic growth
• Wagner’s law
• Panel unit root
• Panel cointegration