Relationship between government expenditure and output in the problematic regions in the European Union

Irena Szarowska

MPRA Paper from University Library of Munich, Germany

Abstract: Economic and debt crisis has increased the attention paid to the development of government expenditure in problematic regions in the European Union. The goal of the article is to provide direct empirical evidence on cyclicality and the long-term and short-term relationship between government expenditure and output in the Portugal, Ireland, Italy, Greece and Spain in a period 1995-2011. We have applied Johansen cointegration test and the error correction model on adjusted annual data of GDP and government expenditure in compliance with the COFOG international standard. Research confirms procyclical development of government expenditure functions on GDP in the selected countries; this procyclicality is in line with development typical for developing countries. Moreover, output and government expenditure are cointegrated for at least six of the expenditure categories in every country and it implies a long-term relationship between government expenditure and output consistent with Wagner’s law. The values of the coefficients for the short-run relationship between expenditure and output confirm the voracity hypothesis, as they suggest that in response to a given shock to real GDP, government expenditure rises by even more in percentage points.

Keywords: government expenditure; cyclicality; voracity effect; Wagner´s law; COFOG classification; long-run elasticity; short-run elasticity (search for similar items in EconPapers)
JEL-codes: C32 E62 E63 H50 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-mac
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Published in Economy of region 4 (2013): pp. 190-199

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Journal Article: Relationship between government expenditure and output in the problematic regions in the European Union (2013)
Journal Article: Relationship between government expenditure and output in the problematic regions in the European Union (2013)
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