Wagner's Law and the Dynamics of Government Spending on Indonesia

The empirical relationship between public expenditure and economic growth can be analysed from different viewpoints. This study focuses on the empirical testing of the validity of Wagner's law for the Indonesian economy. The high economic growth in the sample period of 1980-2014 makes the law l...

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Bibliographic Details
Published in:Bulletin of Indonesian economic studies 2022-01, Vol.58 (1), p.79-95
Main Authors: Inchauspe, Julian, MacDonald, Garry, Kobir, Moch Abdul
Format: Article
Language:English
Subjects:
autoregression
business cycle
Causality
cointergration
consumption
Economic activity
Economic growth
economic output
Economic stabilization
Expenditures
government expenditure
Government spending
Indonesia
Law
Prices
Wagner's law
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Summary:The empirical relationship between public expenditure and economic growth can be analysed from different viewpoints. This study focuses on the empirical testing of the validity of Wagner's law for the Indonesian economy. The high economic growth in the sample period of 1980-2014 makes the law likely to be applicable to Indonesia. Causality and cointegration techniques are used. A key finding in our vector autoregression analysis is unidirectional causality running from GDP and price to government expenditure, supporting Wagner's law. In the case of price and government expenditure, this study also finds evidence of a long-run cointegrating relationship, which appears stable and supports unidirectional causality. The vast majority of the deviations from the equilibrium relationship between government expenditure and price are found to be transitory shocks to government expenditure. Most deviations also appear significantly countercyclical to economic activity, suggesting that government expenditure does play a role in economic stabilisation.
ISSN:0007-4918
1472-7234
DOI:10.1080/00074918.2020.1811837