NATIONAL INCOME AND GOVERNMENT SPENDING: CO-INTEGRATION AND CAUSALITY RESULTS FOR SELECTED LATIN AMERICAN COUNTRIES

This study investigates Wagner’s Law of a long-run tendency for government expenditure to expand at a faster rate than the pace of growth of national output in Chile, Colombia, Honduras, Panama, and Paraguay during the period 1980-2012. Results from the bounds test approach co-integration provide evidence of a long-run relationship between gross domestic product and government expenditure in these countries. Estimates of the long-run coefficient show above-unity elasticities for all five countries. Moreover, Granger Pairwise causality tests show causal linkages running from gross domestic product to government spending. Combined, all these results confirm the validity of Wagner’s Law for this sample of Latin American countries. The policy implications of these findings suggest the governments of these countries should be cautious about their future spending as any further increase could lead to a significant deterioration of their public finances