The impact of government expenditure on economic growth-How sensitive to the level of development.pdf
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The impact of government expenditure on economic growth-How sensitive to the level of development
Journal of Policy Modeling 32 (2010) 804–817
Available online at
The impact of government expenditure on economic
growth: How sensitive to the level of development?
Shih-Ying Wu 1, Jenn-Hong Tang 2, Eric S. Lin ?
Department of Economics, National Tsing Hua University, Hsin-chu 30013, Taiwan
Received 1 January 2010; received in revised form 1 March 2010; accepted 1 April 2010
Available online 19 June 2010
Abstract
Previous studies generally find mixed empirical evidence on the relationship between government spending
and economic growth. In this paper, we re-examine the causal relationship between government expenditure
and economic growth by conducting the panel Granger causality test recently developed by Hurlin (2004,
2005) and by utilizing a richer panel data set which includes 182 countries that cover the period from 1950 to
2004. Our empirical results strongly support both Wagner’s law and the hypothesis that government spending
is helpful to economic growth regardless of how we measure the government size and economic growth.
When the countries are disaggregated by income levels and the degree of corruption, our results also confirm
the bi-directional causality between government activities and economic growth for the different subsamples
of countries, with the exception of the low-income countries. It is suggested that the distinct feature of the
low-income countries is likely owing to their inefficient governments and inferior institutions.
? 2010 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
JEL classification: E24; E32; E52
Keywords: Government size; Economic growth; Wagner’s law; Panel Granger causality
1. Introduction and background
The relationship between government expenditure and economic growth has been an ongoing
issue in debates on economic development. The celebrated “Wagner’s ([1883] 1958) law” pos-
tulates that government spending is income elastic and that the ratio of government spending to
? Corresponding auth
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