The Displacement Effect in the Growth of Governments

Gabriella Legrenzi ()

Public Choice, 2004, vol. 120, issue 1_2, 204 pages

Abstract: We analyze the displacement effect within a multivariate revenue-expenditure model of government growth, based on a long historical dataset, for Italy. Our long-run analysis shows a permanent influence of domestic product on the growth of governments, supporting Wagner's law. The short-run dynamics are more complex and provide some evidence for the displacement effect, in terms of a lower resistance against tax-financing of government spending in the post-war. In addition, government spending adjusts faster when deviations from its equilibrium get larger.

Date: 2004
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