The Relationship between Total Production and Public Spending in Mexico: Keynes versus Wagner

Isaac Sanchez-Juarez,Hector Barajas Bustillos,Rosa M Garcia Almada

doi:10.5430/ijfr.v7n1p109

Isaac Sanchez-Juarez, Hector Barajas Bustillos + Show 1 more

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https://doi.org/10.5430/ijfr.v7n1p109

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Abstract

This paper studies the relationship between public spending and production in Mexico. It aims to assess the direction of causality between these two variables ranging from economic growth to public expenditure (Wagner hypothesis) or public spending to economic growth (Keynesian hypothesis). Annual time series for the period 1925–2014 of production and public spending in real terms (1970 based) and logarithms were used. The test method involved three steps: 1) unit root tests; 2) cointegration test of Engle and Granger and 3) evidence of causality in the Granger sense. The paper uses five different specifications recommended by the specialized international literature. It was found that the series are stationary with regards first differences and are cointegrated, so we can say there is a long-term relationship. Statistical tests of Granger causality indicated that the Wagner hypothesis does not hold, while the Keynes hypothesis is validated. The study concludes that public spending and its proper management is one of the keys to promoting economic growth in Mexico. Originality/value: Time series for a long-term period, based on official information, something not done previously, were developed. This allowed the results to be more reliable than those presented by other authors. In addition, a modern procedure of econometric estimation, allowing the assessment of the two proposed scenarios was used. The work is relevant in terms of the design of economic policy and the pursuit of development in Mexico.

Highlights

This article examines the relationship between economic growth and public spending, a subject largely assessed by many international researchers, which has relevance in terms of economic policy and welfare
Following the work of Henrekson (1993) we estimated five different versions of the Wagner hypothesis (WH), the first already presented in the previous section, the other four are as follows, starting with the version used by Peacock and Wiseman (1961) and Musgrave (1969): G f (GDP)
If the variables are stationary, the classical econometric methods are sufficient, otherwise the variables have unit root that is either not stationary or integrated first-order condition that must be fulfilled to carry out the stage which consists of the analysis of cointegration

Summary

Introduction

This article examines the relationship between economic growth and public spending, a subject largely assessed by many international researchers (see Bergh & Henrekson, 2011), which has relevance in terms of economic policy and welfare. A growing economy receives pressures from society in favor of an increase in public spending, for at least two reasons: 1) the more a society grows, becoming more developed, becoming complex, generating a greater number of conflicts, this requires greater involvement of the government, which should regulate these behaviors and seek solutions; and (2) the goods and public services are upper and elastic with respect to income (product), which means that their income elasticity is greater that unit, small changes in the income of persons lead to major changes in their demand (Magazzino, 2012: 891). The WH contradicts the Keynes hypothesis (KH), according to which, both during a recession and economic boom, fiscal policy ( public investment spending) is a desirable instrument, since it strengthens economic activity. For those who are part of this paradigm, public spending is what determines national production, through the Keynesian multiplier

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