Causal Relationship between Government Spending and Economic Growth in Rajasthan : A Toda - Yamamoto Approach

Abstract

This paper examined the causal link between state government expenditure and net state domestic product of Rajasthan. The study tested the six versions of the Wagner law of state expenditure utilizing the annual time-series data of 44 years from 1970-71 to 2013-2014. The ARDL Model and Toda-Yamamoto approach were applied after testing the stochastic properties of the variables to analyze the long-run equilibrium relationship for all the six versions of the Wagner Law. The empirical results of the ARDL model asserted that there was no long-run relationship between public expenditure and economic growth. However, the results of the Toda-Yamamoto approach indicated that Peacock and Guffman versions were valid for Rajasthan. The findings of the causality analysis revealed that there was unidirectional causality from state government expenditure to net state domestic product and from state government expenditure to per-capita net state domestic product. The study concluded that the Rajasthan economy follows the Keynesian hypothesis of public expenditure and the public expenditure is the causal factor for the growth of net state domestic product in the state.