The Relation of Public Expenditures with Economic Growth in OECD Countries

Abstract

Many empirical studies have been conducted to analyse the relationship between public spending and economic growth. In the literature review for the analysis of this relationship, the studies are concentrated around Keynes and Wagner Hypothesis. Wagner argues that this relationship is from economic growth to public expenditures while Keynes argues that it is from public expenditures to economic growth. In this study, Keynes's hypothesis is examined through the use ofthe variables of economic growth, public expenditures, inflation and unemployment for some OECD member countries. The findings performed with the panel unit root and panel cointegration tests under the cross-sectional dependency in the analyses are as follows. The variables that make up the study are cointegrated among themselves. In the long-term analysis, a significant relationship was not obtained, which indicates that public expenditures and inflation affect economic growth. It is concluded that unemployment negatively affects economic growth. In the short run, it was found that both public expenditures and inflation positively affected economic growth, while unemployment had a negative effect. In the study, it is concluded that the Keynes Hypothesis is valid for DEU, CZE, GBR, HUN and SVK, but not valid for BEL, FIN and IRL.

Keywords

• public expenditures
• economic growth
• panel data analysis