Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-30T23:36:36.080Z Has data issue: false hasContentIssue false
  • English
  • Français

THE CAUSE OF HIGHER ECONOMIC GROWTH: ASSESSING THE LONG-TERM AND SHORT-TERM RELATIONSHIPS BETWEEN ECONOMIC GROWTH AND GOVERNMENT EXPENDITURE

Published online by Cambridge University Press:  20 June 2014

Motasam Tatahi ,
Emre Ipekci Cetin  and
M. Koray Cetin
Motasam Tatahi*
Affiliation:
European Business School—London
Emre Ipekci Cetin
Affiliation:
Akdeniz University—Antalya
M. Koray Cetin
Affiliation:
Akdeniz University—Antalya
*
Address correspondence to: Motasam Tatahi, Department of Finance and Economics, European Business School—London, Inner Circle, Regent's Park, London NW1 4NS, UK; e-mail: tatahim@regents.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

This study examines the cause of higher (5% or more) economic growth rates in countries around the world over the past 35 years. It explores the long- and short-term relationships between GDP and government expenditures in these countries. A panel data set of 60 countries over the period from 1976 to 2010 is deployed to implement pooled mean group estimation. Countries are divided into three economic growth rate groups: high, middle, and low. Panel-based/error correction models are used to estimate long-term equilibrium relationships and short-term dynamics between government expenditures and GDP growth rates. Results indicate that the hypothesis of a common long-term elasticity and a short-term dynamic relationship between GDP growth rates and government expenditures cannot be rejected for high group countries, whereas for middle group countries this is true only for the long term, not for the short term. No long-term or short-term relationship between these two variables exists for low-growth-rate countries.

Keywords

Government ExpenditureGrowth RatesPanel Co-integrationError Correction Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 229 - 250
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abu-Bader, S. and Abu-Qarn, A.S. (2003) Government expenditures, military spending and economic growth: Causality evidence from Egypt, Israel, and Syria. Journal of Policy Modelling 25, 567–583.CrossRefGoogle Scholar
Ahsan, S., Kwan, A., and Sahni, B. (1989) Causality between government consumption expenditures and national income: OECD countries. Public Finance 44 (2), 204–224.Google Scholar
Akitoby, B. and Cinyabuguma, M. (2004) Sources of Growth in the Democratic Republic of the Congo: A Cointegration Approach. IMF working paper 04/114, International Monetary Fund, Washington, DC.CrossRefGoogle Scholar
Alesina, A. and Wacziarg, R. (1998) Openness, country size, and government. Journal of Public Economics 49, 305–321.CrossRefGoogle Scholar
Al-Faris, A.F. (2002) Public expenditure and economic growth in the Gulf Cooperation Council countries. Applied Economics 34 (9), 1187–1193.CrossRefGoogle Scholar
Ansari, M.I., Gordon, D.V., and Akuamoah, C. (1997) Keynes versus Wagner: Public expenditure and national income for three African countries. Applied Economics 29, 543–550.CrossRefGoogle Scholar
Arpaia, A. and Turrini, A. (2008) Government Expenditure and Economic Growth in the EU: Long-Run Tendencies and Short-Term Adjustment, European Economy. Economic paper 300, Directorate General Economic and Monetary Affairs, European Commission.CrossRefGoogle Scholar
Banerjee, A., Marcellino, M., and Osbat, C. (2004) Some cautions on the use of panel methods for integrated series of macroeconomic data. Econometrics Journal 7, 322–340.CrossRefGoogle Scholar
Banerjee, A., Marcellino, M., and Osbat, C. (2005) Testing for PPP: Should we use panel methods? Empirical Economics 30 (1), 77–91.CrossRefGoogle Scholar
Barrell, R. and Davis, E.P. (2004) Consumption, Financial and Real Wealth in the G-5. Discussion paper 232, National Institute of Economic and Social Research, London.Google Scholar
Barth, J., Keleher, R., and Russes, F. (1990) The scale of government and economic activity. Southern Business and Economic Journal 13, 142–183.Google Scholar
Baumol, W. (1967) Macroeconomics of unbalanced growth: The anatomy of urban crisis. American Economic Review 57, 415–426.Google Scholar
Borcherding, T.E. (1985) The causes of government expenditure growth: A survey of the US evidence. Journal of Public Economics 28, 359–382.CrossRefGoogle Scholar
Cameron, G., Gai, P., and Tan, K.Y. (2006). Sovereign Risk in the Classical Gold Standard Era. Working paper 11, Australian National University—Centre for Applied Macroeconomic Analysis.Google Scholar
Chang, T. (2002) An econometric test for Wagner's Law for six countries based on cointegration and error correction modelling techniques. Applied Economics 34, 1157–1169.CrossRefGoogle Scholar
Cheng, B.S. and Lai, T.W. (1997) Government expenditures and economic growth in South Korea: A VAR approach. Journal of Economic Development 22 (1), 11–24.Google Scholar
Conte, M.A. and Darrat, A.F. (1988) Economic growth and the expanding public sector: A re-examination. Review of Economics and Statistics 70 (2), 322–330.CrossRefGoogle Scholar
D'Addio, A. and D'Ercole, M. Mira (2005) Policies, institutions and fertility rates: A panel data analysis in OECD countries. OECD Economic Studies 41, 7–43.Google Scholar
Dandan, M.M. (2011) Government Expenditures and Economic Growth in Jordan. In International Conference on Economics and Finance Research (IPEDR), Vol. 4, pp. 467–470. Singapore: IACSIT Press.Google Scholar
Ekanayake, E.M. (1999) Exports and economic growth in Asian developing countries: Cointegration and error-correction models. Journal of Economic Development 24 (2), 43–56.Google Scholar
Engle, R.F. and Granger, C.W.J. (1987) Cointegration and error correction: Representation, estimation, and testing. Econometrica 55, 251–276.CrossRefGoogle Scholar
Funke, K. and Nickel, C. (2006) Does Fiscal Policy Matter for the Trade Account? A Panel Cointegration Study. ECB working paper 620.CrossRefGoogle Scholar
Ghali, K.H. (1999) Government size and economic growth: Evidence from a multivariate cointegration analysis. Applied Economics 31 (8), 975–987.CrossRefGoogle Scholar
Golinelli, R. and Pastorello, S. (2002) Modelling the demand for M3 in the euro area. European Journal of Finance 8, 371–401.CrossRefGoogle Scholar
Granger, C.W.J. (1986) Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics 48, 213–228.CrossRefGoogle Scholar
Guellec, D. and van Pottelsberghe de la Potterie, B. (2001) R&D and productivity growth: Panel data analysis of 16 OECD countries. OECD Economic Studies 33, 2001/II.Google Scholar
Hallerberg, M., Strauch, R., and Von Hagen, J. (2001) The Use and Effectiveness of Budgetary Rules and Norms in EU Member States. Report prepared for the Dutch Ministry of Finance by the Institute of European Integration Studies.Google Scholar
Heller, P.S. and Diamond, J. (1990) International Comparison of Government Expenditure Revisited: The Developing Countries 1975–1986. IMF occasional paper 69.Google Scholar
Holmes, J.M. and Hutton, P.A. (1990) On the causal relationship between government expenditures and national income. Review of Economics and Statistics 72 (1), 87–95.CrossRefGoogle Scholar
Kolluri, B.R., Panik, M. J., and Wahab, M.S. (2000) Government expenditure and economic growth: Evidence from G7 countries. Applied Economics 32, 1059–1068.CrossRefGoogle Scholar
Landau, D. (1983) Government expenditure and economic growth: A cross-country study. Southern Economic Journal 49 (3), 783–792.CrossRefGoogle Scholar
Landau, D. (1986) Government and economic growth in the less developed countries: An empirical study for 1960–1980. Economic Development and Cultural Change 35 (1), 35–75.CrossRefGoogle Scholar
Loayza, N. and Ranciere, R. (2006) Financial development, financial fragility, and growth. Journal of Money, Credit and Banking 38, 1051–1076.CrossRefGoogle Scholar
Milesi-Ferretti, G.M., Perotti, R., and Rostagno, M. (2002) Electoral systems and public spending. Quarterly Journal of Economics 117, 609–656.CrossRefGoogle Scholar
Pedroni, P. (1995) Panel Cointegration; Asymptotic and Finite Sample Properties of Pooled Time Series Tests, with an Application to the PPP Hypothesis. Indiana University working paper in economics 95–013.Google Scholar
Pedroni, P. (1997) On the Role of Cross Sectional Dependency in Panel Unit Root and Panel Cointegration Exchange Rate Studies. Working paper, Indiana University.Google Scholar
Pedroni, P. (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61 (S1), 653–670.CrossRefGoogle Scholar
Pedroni, P. (2000) Fully modified OLS for heterogeneous cointegrated panels. Advances in Econometrics 15, 93–130.CrossRefGoogle Scholar
Peltzman, S. (1980) The growth of government. Journal of Law and Economics 23, 209–289.CrossRefGoogle Scholar
Persson, T., Roland, G., and Tabellini, G. (2000) Comparative politics and public finance. Journal of Political Economy 108, 1121–1161.CrossRefGoogle Scholar
Persson, T. and Tabellini, G. (1999) The size and scope of government: Comparative policies with rational politicians. European Economic Review 63, 699–735.CrossRefGoogle Scholar
Pesaran, M.H., Shin, Y., and Smith, R. (1999) Pooled mean group estimator of dynamic heterogeneous panels. Journal of the American Statistical Association 94, 621–634.CrossRefGoogle Scholar
Ram, R. (1986) Government size and economic growth: A new framework and some evidence from cross-section and time-series data. American Economic Review 76 (1), 191–203.Google Scholar
Ram, R. (1987) Wagner's hypothesis in time-series and cross-section perspectives: Evidence from “real” data for 115 countries. Review of Economics and Statistics 69, 194–204.CrossRefGoogle Scholar
Ray, S. and Ray, I.A. (2012) On the relationship between government's developmental expenditure and economic growth in India: A cointegration analysis. Advances in Applied Economics and Finance 1 (2), 86–94.Google Scholar
Rodrik, D. (1998) Why do more open economies have bigger governments? Journal of Political Economy 151, 997–1032.CrossRefGoogle Scholar
Singh, B. and Sahni, B.S. (1984) Causality between public expenditure and national income. Review of Economics and Statistics 66 (4), 630–644.CrossRefGoogle Scholar
Tanzi, V. and Schuknecht, L. (2000) Public Spending in the 20th Century: A Global Perspective. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Von Hagen, J. and Harden, I.J. (1995) Budget processes and commitment to fiscal discipline. European Economic Review 39 (3), 771–779.CrossRefGoogle Scholar
Wahab, M. (2004) Economic growth and government expenditure: Evidence from a new test specification. Applied Economics 36, 2125–2135.CrossRefGoogle Scholar
Wu, S.Y., Tang, J.H., and Lin, E.S. (2010) The impact of government expenditure on economic growth: How sensitive to the level of development? Journal of Policy Modelling 32, 804–817.CrossRefGoogle Scholar