Public spending and Wagner’s law in Central and Eastern European Countries

Szarowska, Irena (2012): Public spending and Wagner’s law in Central and Eastern European Countries. Published in: Acta Universitatis Agriculturae et Silviculturae Mendeleianae Brunensis , Vol. 60, No. 2 (2012): pp. 383-390.

Abstract

This paper provides direct empirical evidence on cyclicality and the long-term and short-term relationship between government spending and output in eight Central and Eastern European countries in a period 1995–2009. We analyzed annual data on government spending in compliance with the COFOG international standard. Although the theory implies that government spending is countercyclical, our research does not prove that. The results confirm cyclical development of government spending on GDP, Wagner´s law and voracity effect in the CEE countries during 1995–2009. We used Johansen cointegration test and the error correction model. Output and government spending are cointegrated for at least 4 from 10 spending functions in every country and it implies a long-term relationship between government spending and output. The government spending functions are procyclical in most CEE countries (93% cases in the sample). Average value of long-run elasticity coefficient is 1.74 for all spending functions, 1.02 for total government spending. We also analyzed the short-run relationship between spending and output. The coefficient values (average is 2.89) confirm the voracity hypothesis, as they suggest that in response to a given shock to real GDP, government spending rises by even more in percentage points.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government spending, cyclicality, voracity effect, long-run elasticity, short-run elasticity, cointegration, error correction term
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; 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 > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

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