The relationship between public expenditure and economic growth in Romania: Does it obey Wagner’s or Keynes’s Law?

Abstract

After joining the European Union, Romania began a harmonization process with European requirements and best practices in both the economic and political system. This new approach influenced policy making processes with implications in fiscal and budgetary areas in order to ensure durable economic growth. The purpose of this paper is to examine the relationship between public expenditure and economic growth from the perspectives of Keynes and Wagner′s law on Romania. Five representations of both Wagner’s and Keynes’s Law are tested, using annual time series data covering the period 1991-2014 after the fall of the Iron Curtain. To estimate the long-run relationship between government expenditure and economic growth, ARDL (Auto- Regression Distributed Lag) approach and Bounds Test based on Unrestricted Error Correction Model (UECM) estimation are used. Empirical results indicate that there exists a unidirectional long-run relationship from government expenditures to economic growth in Romania, which means the economic growth could affect the government expenditure. In contrast, Keynes’s Law does not hold for over the period. Based on this result the government can determine the causality between economic growth and public expenditure and better formulate strategies for different faces of the economic conjuncture.

Keywords

• Wagner’s law
• Keynes’ law
• Romanian public expenditure
• economic growth
• ARDL
• bounds test