Abstract
Abstract The paper aims at examining the causal relationship between economic growth and government expenditure in selected MENA countries over the period of 1987–2017. Unlike previous studies, we examine the causality in both panel data and time series data to get a clear idea about the causal relationships individually and as a full sample. We also revisited the causal relationship between the two variables within the framework of frequency domain causality. Our findings support the neutrality hypotheses in the short-run term for most of the countries. Thus, economic growth and government expenditure at most frequency levels evolve independently. On the other hand, we found the support of Wagner’s law, Keynes view, neutrality and bidirectional hypotheses in the long term.
Highlights
After the Russian revolution in 1917 and the Great Depression in 1929, the relationship between government expenditure and economic growth became a hot debate among economists and policy-makers especially in developing countries (Karhan, 2018)
At the other extreme, according to Keynes’s (1936) view, the causal relationship is running from government expenditure to economic growth, which means that government expenditure is seen as an exogenous factor
The results presented in Appendix indicate that in the short-run term only two countries (Algeria and Morocco) support the Keynes’s view hypothesis; this implies a unidirectional causality from government expenditure to economic growth
Summary
After the Russian revolution in 1917 and the Great Depression in 1929, the relationship between government expenditure and economic growth became a hot debate among economists and policy-makers especially in developing countries (Karhan, 2018). The German economist Adolph Wagner (1893) was the first who attempted to test the causal relationship between economic growth and government expenditure (published the Foundations of Political Economy, the main idea of this book is that economic growth in any nation enhances the role of government and this is referred to as Wagner’s law in the economic literature). It is clear that there is a unidirectional causal relationship running from economic growth to government expenditure not the opposite (Wagner, 1892). At the other extreme, according to Keynes’s (1936) view (who published the General Theory of Employment, Interest and Money, in which he showed the crucial role of government in stimulating economic growth), the causal relationship is running from government expenditure to economic growth, which means that government expenditure is seen as an exogenous factor
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