Acta Univ. Agric. Silvic. Mendelianae Brun. 2012, 60(2), 383-390 | DOI: 10.11118/actaun201260020383

Public spending and Wagner's law in Central and Eastern European countries

Irena Szarowská
Katedra financí, Obchodnì podnikatelská fakulta, Slezská univerzita Opava, Univerzitní nám. 1934/3, 733 40 Karviná, Èeská republika

This paper provides direct empirical evidence on cyclicality and the long-term and short-term relationship between government spending and output in eight Central and Eastern European countries in a period 1995-2009. We analyzed annual data on government spending in compliance with the COFOG international standard. Although the theory implies that government spending is countercyclical, our research does not prove that. The results confirm cyclical development of government spending on GDP, Wagner's law and voracity effect in the CEE countries during 1995-2009.
We used Johansen cointegration test and the error correction model. Output and government spending are cointegrated for at least 4 from 10 spending functions in every country and it implies a long-term relationship between government spending and output. The government spending functions are procyclical in most CEE countries (93% cases in the sample). Average value of long-run elasticity coefficient is 1.74 for all spending functions, 1.02 for total government spending. We also analyzed the short-run relationship between spending and output. The coefficient values (average is 2.89) confirm the voracity hypothesis, as they suggest that in response to a given shock to real GDP, government spending rises by even more in percentage points.

Keywords: government spending, cyclicality, voracity effect, long-run elasticity, short-run elasticity, cointegration, error correction term
Grants and funding:

This article ensued thanks to the support of the grant GA ÈR 403/11/2073 Procyclicality of financial markets, asset price bubbles and macroprudential regulation.

Received: November 30, 2011; Published: October 3, 2013  Show citation

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Szarowská, I. (2012). Public spending and Wagner's law in Central and Eastern European countries. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(2), 383-390. doi: 10.11118/actaun201260020383
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