Abstract

The government expenditure is the instrument used by the government to increase regional economy. The objective of the research was to analyze the reciprocal correlation of government expenditure with the economy of North Sumatera. The research was quantitative analytic with secondary data with the time series obtained from BPS (Central Bureau of Statistics) of North Sumatera. The data were analyzed by using Vector Autoregression (VAR) analysis with Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD). The result of the research, using lag 1, showed that there was the contribution of each variable to the variables themselves and to other variables. The variable which had the most effective influence on the economic growth was government expenditure. The variable economic growth had the most effective influence on government expenditure on long term.

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