Causal relationships between public expenditure, public receipts and gross domestic product: Greece 1965-95

Abstract

This paper applies the well-known Granger causality approach to investigate the causal relationships between (a) Greek public expenditure and Gross Domestic Product and (b) Greek public expenditure and public receipts. The results suggest that an increase in public expenditure does not lead to an increase in GDP; and that an increase in public expenditure does lead to an increase in public receipts. These results imply that in terms of output growth, the fiscal policy applied in the late 1970s and the 1980s was rather ineffective; and the correction of the existing fiscal imbalances is conditional upon a reduction in public expenditure rather than an increase in public receipts. From that point of view, the effectiveness of the currently applied fiscal strategy is questionable.