Public Spending in Selected Caribbean Countries

Abstract

This study examines the relationship between the ratio of government expenditure to gross domestic product and economic activity by investigating the empirical validity of Wagner’s law in selected Caribbean countries. Additionally, the study tests the ratchet hypothesis by searching for evidence of asymmetry in public spending over the business cycle. It narrows a gap in the Caribbean literature by (1) explicitly considering population structure in the empirical investigation of Wagner’s Law and (2) utilizing advanced econometrics techniques that incorporate nonlinearity in testing causality. The study finds no empirical support for Wagner’s Law, with and without population structure taken into account. However, the ratchet hypothesis is validated. The findings provide useful information for policy makers that can help broaden their understanding of the relationship between government spending and national income, which could aid policy formulation.