Validity of Wagner’s Law in EU Member Transition Economies: Panel Causality Analysis

Abstract

One of the main issues which has been given great emphasis in economics literature, particularly since the 19th century, is that of the relationship between public expenditure and economic growth. There are two theoretical approaches in the literature dealing with this relationship. The first is Wagner’s law which states that public expenditure increases as growth expands. The second is related to the Keynesian hypothesis which states that public spending encourages growth. In other words, while Wagner asserts that the causality runs from growth to public spending, Keynes claims that public spending causes growth. In this study, the validity of Wagner’s Law was analyzed with the Dumitrescu and Hurlin (2012) panel causality test using annual data from between the years 1995 and 2019 for eleven European Union member transition economies. Our main purpose in this study was to determine whether public expenditure can be used as an effective policy tool in transition economies that are members of the European Union. The test results revealed that there is one-way causality from growth to public spending. In other words, Wagner’s Law is valid for the country group and period subject to the study