Testing Augmented Wagner’s Law for Nigeria Based on Cointegration and Error-Correction Modelling Techniques

Alimi, R. Santos (2013): Testing Augmented Wagner’s Law for Nigeria Based on Cointegration and Error-Correction Modelling Techniques.

Abstract

Wagner’s Law is the first model of public spending in the history of public finance. The study tests the validity of Wagner’s Law that there is a long-run tendency for public expenditure to grow relative to national income. This implies that public expenditure can be treated as an endogenous factor, not a cause of growth in national income. In contrast, Keynesian hypothesis treats public expenditure as an exogenous factor. “Augmented” version of Wagner’s Law, where public deficit appears as further explanatory variable, is also investigated. Assessing the empirical evidence of these hypotheses in Nigeria, for the period 1970-2012, the study employed Johansen Cointegration Techniques with its associated Error Correction Model for the short run dynamics. We found bi-directional causal relation for the short run dynamics for five out of seven formulations while the long run empirical evidence seems to be most favourable to Wagner’s hypothesis rather than the Keynesian one, therefore suggesting that causality run from real income to government expenditure.

• Item Type: MPRA Paper
• Language: English
• Keywords: public spending; economic growth; Wagner’s Law; error correction model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E0 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; H - Public Economics > H6 - National Budget, Deficit, and Debt

References

Abdullah H.A, (2000). The Relationship between Government Expenditure and Economic Growth in Saudi Arabia. Journal of Administrative Science, 12(2): 173-191

Abizadeh, S. and Gray, J. (1985). Wagner’s Law: a Pooled Time-Series Cross-Section Comparison. National Tax Journal, 88: 209-18

Abizadeh, S. and Yousefi, M. (1998). An Empirical Analysis of South Korea’s Economic Development and Public Expenditure Growth. The Journal of Socio-Economics, 27(6): 687-94.

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 Modeling, 25(6-7), 567-583

Afxentiou, P.C., and A.Serletis (1996). Government Expenditures in the European Union: Do They Converge or Follow Wagner’s Law? International Economic Journal, 10, 33-47

Aigbokhan, B. E. (1996). Government Size and Economic Growth: The Nigerian Experience in “Beyond Adjustment: Management of the Nigerian Economy. Proceedings of the 1996 annual Conference of the Nigerian Economic Society.

Al-Faris, A. F. (2002). Public Expenditure and Economic Growth in the Gulf Cooperation Council Countries. Applied Economics, 34(9): 1187-95

Al-Yousif Y, (2000). Does Government Expenditure Inhibit or Promote Economic Growth: Some Empirical Evidence from Saudi Arabia. Indian Economic Journal, 48(2).

Aregbeyen, O. (2006). Cointegration, Causality and Wagner’s Law: A Test for Nigeria, 1970-2003. Central Bank of Nigeria Economic and Financial Review, Volume 44 Number 2. June.

Babatunde, M.A. (2007). A bound testing analysis of Wagner’s law in Nigeria: 1970-2006. Proceedings of Africa Metrics Conference.

Bannerjee, A. V., Newman, A. F. (1998), Occupational Choice and the Process of Development. Journal of Political Economy, 101, 274-298.

Burney,Nadeem A. (2002). Wagner’s Hypothesis: Evidence from Kuwait Using Cointegration tests. Applied Economics, 34, 49-57.

Chang, T. (2002). An Econometric Test of Wagner’s Law for Six Countries, based on Cointegration and Error-Correction Modelling Techniques. Applied Economics, 34, 1157-1169

Cheung, Y., Lai, K., (1993). Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford bulletin of Economics and Statistics, 55, 313-328.

Dakurah H., Davies S. And Sampath R. (2001). Defense Spending and Economic Growth in Developing Countries: A Causality Analysis. Journal of Policy Modeling, 23(6), 651-658.

Dickey, D., and Fuller, W. (1979). Distribution Of The Estimators For Autoregressive Time Series With A Unit Root. Journal of the American Statistical Association, 74:427–731.

Ergun, D and Tuck, C. (2006). Government Expenditure and National Income: Causality Tests for Five South East Asian Countries. International Business and Research Journal, 5(10), 49-58.

Essien E.A. (1997). Public Sector Growth, An Econometric Test of Wagner’s Law. CBN Economic and Financial Review, 35(3).

Goffman I.J. (1968). On the Empirical Testing of Wagner’s Law: A Technical Note. Public Finance, 23, 359-364.

Granger, C. W. J., Newbold, P., (1974). Spurious regression in econometrics. Journal of Econometrics, 2, 111-120

Greene, W.H., (2000). Econometric Analysis (4e). New Jersey: Prentice-Hall, Inc.

Gupta S. (1967). Public Expenditure and Economic Growth: A Time Series Analysis. Public Finance, 22, 423-461.

Halicioglu F. (2005). Testing Wagner’s Law for Turkey, 1960-2003, Public Economics

Harris, R., (1995). Using cointegration analysis in econometric modelling. London: Prentice Hall.

Huang, C-J. (2006). GovernmentExpenditures In China And Taiwan: Do They Follow Wagner’s Law? Journal of Economic Development, 31(2)

Johansen, S. and Juselius, K., (1990) .Maximum likelihood estimation and inference on cointegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.

Johansen, S., (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580.

Johansen, S., (1995). Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford: Oxford University Press.

Magazzino, Cosimo (2010). Wagner's law and Italian disaggregated public spending: some empirical evidences. Retrieved from http://mpra.ub.uni-muenchen.de/26662/

Mann A.J. (1980). Wagner’s Law: An Econometric Test for Mexico, 1925-76. National Tax Journal, 33, 189-201

Muhlis, B and Hakan C. (2003). Causality between Public Expenditure and Economic Growth: The Turkish Case. Journal of Economic and Social Research 6 (1): 53-72.

Murthy V. (1994). Wagner’s Law, Spurious in Mexico or Misspecification: a reply. Public Finance, 49(2), 295-303.

Musgrave R.A. (1969). Fiscal Systems, New Haven: Yale University Press.

Narayan P.K., Nielsen I. and Smyth R. (2008). Panel Data, cointegration, causality and Wagner‟s law: Empirical evidence from Chinese provinces. China Economic Review, 19(2), June, 297-307

Omoke P. (2009). Government Expenditure and National Income: A Causality Test for Nigeria. European Journal of Economic and Political Studies, Vol. 2: 1-11

Osterwald-Lenum, M., (1992). A note with quintiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics. Oxford bulletin of Economics and Statistics 54, 461-472

Peacock, A.T., and J. Wiseman (1967). The Growth of Public Expenditure in the United Kingdom, London: George Allen & Unwin.

Phillips P.C.B., Perron P. (1988). Testing for a unit root in a time series regression. Biometrika, 75, 335-346

Pryor, F.L. (1968). Public Expenditures in Communist and Capitalist Nations. London: George Allen and Unwin.

Ram, R. (1986). Causality between Income and Government Expenditure: A Broad International Perspective. Public Finance, 41, 393-413

Singh and Sahni (1984). Causality between Public Expenditure and National Income. The Review of Economics and Statistics 66, 630-644.

Wagner A.H. (1883). Finanzwissenschaft, Leipzig.

Wagner, R.E., and W.E. Weber (1977). Wagner’s Law, Fiscal Institutions and the Growth of Government. National Tax Journal, 30, 59-68

Ziramba E. (2008). Wagner’s Law: An Econometric Test for south Africa, 1960-2006, South Africa Journal of Economics, 76(4), 596-606.