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Temporal Causality between Taxes and Public Expenditures: The Case of South Africa

Ndahiriwe Kasai and Rangan Gupta ()

No 200709, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates the direction of causal relationship between taxes and expenditure in South Africa, using quarterly data for the period 1960:1-2006:2, and annual data for 1960 to 2005. For both frequencies, gross domestic product and government debt are included in the VAR system as control variables. For quarterly data the Johansen’s (1991, 1995) methodology suggest two cointegrating equations among the four variables. Our findings support the fiscal synchronisation hypothesis, since Granger causality tests in a Vector Error Correction framework suggests bi-directional causality between taxes and expenditure for the period under study. In contrast to the VECM for quarterly data, the VECM for annual data disprove any option of Granger causality between taxes and expenditure. The apparent ambiguity is indication of the fact that causality, among other factors, depends on the frequency of data.

Keywords: Granger causality; Cointegration; Error correction; Vector error correction model; Vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C01 C32 H20 H50 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007-07
New Economics Papers: this item is included in nep-afr and nep-pbe
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