The effect of federal government size on economic growth in Nigeria, 1961-2011

Awomuse, Bernard O. and Olorunleke, Kola and Alimi, R. Santos (2013): The effect of federal government size on economic growth in Nigeria, 1961-2011. Published in: Developing Country Studies , Vol. 3, No. 7 (July 2013): pp. 68-76.

Abstract

This study investigates whether there is statistical evidence for a causal relationship between federal government expenditures and growth in real per-capita GDP in the Nigeria, using long and up to date available time series data (1961-2011). After studying the time-series properties of these variables for stationarity and cointegration, we adopted Toda and Yamamoto’s (1995) Granger non-causality tests and investigate Granger causality in detail in the context of a Vector Autoregressive Model. The Empirical results from cointegration test indicate that there exists no long-run relationship between government expenditure and economic growth in Nigeria. The Toda and Yamamoto’s causality test results show that Wagner’s Law does not hold over the period being tested. However, using VAR Granger causality test we found a weak empirical support in the proposition by Keynes that public expenditure is an exogenous factor and a policy instrument for increasing national income in the short run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Federal government size, Wagner’s Law, Cointegration, Granger causality, Vector Autoregression
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies

References

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.

Akpan, N. I. (2005). Government Expenditure and Economic Growth in Nigeria, A Disaggregated Approach. Central Bank of Nigeria Financial Review, Vol.43, No.1.

Akpan, U.F. (2011). Cointegration, Causality and Wagner's Hypothesis: Time Series Evidence for Nigeria, 1970-2008. Journal of Economic Research 16 (2011) pp 59-84

Alexiou, C. (2009). Government Spending and Economic Growth: Econometric Evidence from South Eastern Europe (SSE). Journal of Economic and Social Research, Vol.11(1), pp.1-16

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.

Belgrave, A. and Craigwell, R. (1995). The impact of Government Expenditure on economic growth in Barbados: A Disaggregate Approach. Research Department, Central Bank of Barbados.

Dolado, J.J. and Lütkepohl, H., (1996). Making Wald Tests work for Cointegrated VAR Systems. Econometric Review 15(4), 369-386.

Enders, W (2004). Applied Econometrics Time Series. New York: John Wiley.

Engle, R.F., and Granger C.W.J. (1987). Co-integration and Error Correction: Representation, Estimation, and Testing, Econometrica, 55,391-407

Essien E.A. (1997). Public Sector Growth, An Econometric Test of Wagner’s Law. Economic and Financial Review, Vol.35, No.3, 1997. Central Bank of Nigeria.

Granger, C.W.J. (1969). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 37, 424–438.

Gujarati, D. N and Porter, D.C. (2009). Basic Econometrics. McGraw Hill, New York, Fifth Edition

Gujarati, D.N (2006). Essential of Econometrics, 3rd Edition, McGraw Hill

Idowu, K. O. (2005). A Preliminary Investigation into the Causal Relationship between Exports and Economic Growth in Nigeria. CBN Economic and Financial Review, 43(3),29-50.

Johansen, S. & 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.

Komain J, Brahmasrene T. (2007). The Relationship between Government Expenditures and Economic Growth in Thailand. Journal of Economics and Economic Education Research.

Landau, D. (1986). Government and Economic Growth in the Less Developed Countries: An Empirical Study of 1960-80. Economic and Culture. Vol. 35, pp 35-76.

Laudau D. (1983). Government Expenditure and Economic Growth: A Cross Country Study. Southern Economic Journal, Vol. 49, 783-792.

Lindauer, D.L. and A.D. Velenchik (1992). Government Spending in Developing Countries: Trends, Causes, and Consequences. World Bank Observer 7, January pp. 59-78.

Maddala, G.S (2001). Introduction to Econometrics, 3rd Edition, Wiley and Sons, Inc

Nurudeen, A and Usman, A (2010). Government Expenditure And Economic Growth In Nigeria, 1970-2008: A Disaggregated Analysis. Business and Economics Journal, BEJ-4 1.

Olukayode, M. E.(2009). Does Government Spending Spur Economic Growth in Nigeria?. MPRA paper No. 17941

Oriakhi, D. E. and Arodoye, L. N. (2013). The Government Size – Economic Growth Relationship: Nigerian Econometric Evidence Using a Vector Autoregression Model. International Journal of Business and Management; Vol. 8, No. 10.

Taban, S. (2010). An Examination of the Government Spending and Economic Growth Nexus for Turkey Using Bound Test Approach. International Research Journal of Finance and Economics, Vol. 48, pp.184-193

Toda, H.Y. & P.C.B. Phillips (1994). Vector Autoregressions and Causality: A Theoretical Overview and Simulation Study. Econometric Reviews 13, 259-285

Toda, H.Y. & Yamamoto (1995). Statistical inference in Vector Autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225-250.

Vu Le, M. and Suruga, T. (2005). Foreign Direct Investment, Public Expenditure and Economic Growth: The Empirical Evidence for the Period 1970-2001. Applied Economic Letters, Vol.12, pp.45-49

Wagner, A. (1890). Finanzwissenschaft, 3rd ed. Leipzig

Yamada, H. (1998). A note on the causality between export and productivity: an empirical re-examination. Economics Letters, 61, 111-114.