Revisit Keynesian versus Wagner using Continuous Wavelet Analysis in China

Abstract: COVID-19 epidemic has forced the Chinese government to launch RMB$3 trillion fiscal expansion spending to fight for the stagnant recession economy in China. Whether this fiscal expansion policy will work, it depends on the causal direction between government spending and output. We use government expenditure and GDP from China to revisit Keynesian versus Wagner hypothesis during the period of 1992Q2 to 2017Q2. Results from continuous wavelet tool demonstrate strong co-movements between government expenditure and GDP during 1992-1996, 2004-2007 and 2012-2017 periods, support Keynesian view during 1997-2002 and Wagner view during 2008-2010 in 1-4 year frequency band (short-term). Findings also find strong co-movements between government expenditure and GDP for most of the time during 1992-2017 in 4-8 year frequency band (long-run), except for 2005-2007 supporting Wagner view. Results have important policy implications in China to maintain its economic development. Keywords: COVID-19, COCID-19, Keynesian, Wagner, Wavelet Analysis, VAR Model, Grange Causality Test JEL Classification Number: E12, E61, E62, F6