Abstract
The economy of Ghana profiles a trajectory of increasing government expenditure at the backdrop of an inconsistent growth in real GDP. Thus, this study explores the causal relationship between real economic growth and real government expenditure in Ghana between the period 1960 to 2017. The Johansen (1991, 1995) cointegration method, the Autoregressive Distributed Lag bounds test approach and the Toda-Yamamoto non-Granger causality test are employed in this study. The findings are that the variables are cointegrated, and there is no Granger causality from real economic growth to real government expenditure. In effect, the causality shows that the Wagner’s hypothesis does not hold in the case of the Ghanaian economy and that the Keynesian theoretical standpoint that public expenditure is an exogenous factor is not deflated in this case.
Highlights
Since the introduction of Wagner’s law in 1890, the causal relationship between economic growth and government spending has been a point of contention for economists around the globe
This study explores the causal nexus between real public expenditure and real economic growth
As the t-statistics of the unit root test in first difference with constant only and constant and trend are above the critical values for all the approaches, the null hypothesis of unit root at the (1%) significance level is rejected and concluded that the variables are integrated of order one
Summary
Since the introduction of Wagner’s law in 1890, the causal relationship between economic growth and government spending has been a point of contention for economists around the globe. A study conducted by Kumar, Webber and Fargher (2012) on Wagner’s law for New Zealand with data over the period 1960 to 2007 showed that output measures Granger cause government expenditure in the long-run supporting Wagner’s law They made use of ARDL model in their analysis. Through the application of ARDL, Kumar et al (2012) used data covering the period of 1960–2007 to study the validity of Wagner’s law for New Zealand Their findings proved that output measure Granger causes the share of government expenditure in the long-run, thereby giving support for the existence of the Wagner’s law in New Zealand. Utilising data from 1970 to 2004, the Auto-Regressive Distributed Lag model and the bounds test, Samudram et al (2009) studied the validity of Wagner’s law and Keynesian hypothesis for Malaysia Their results indicate that there exists a long-run bi-directional causality relationship between GNP and government expenditure
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