The association between government expenditure and economic growth: the Granger causality test of the U.S. data

ABSTRACT. Wagner’s Law and Keynesian’s theory are two widely accepted yet contrasting propositions. This paper employs Granger causality test on US federal government data, from 1947 to 2002. We used aggregate data as well as disaggregate data with the sub-categories of five federal expenditures, including: national defense, human resources expenditure, physical resources expenditure, net interest payment, and other expenditure. The results of our study suggest that total federal government expenditure is more consistent with Keynesian’s theory while there are diversified causal relationships among five sub-category of federal expenditure. The policy recommendation generated from this paper is that the US federal government should invest more public resources in human resources expenditure assuming that economic growth is the utmost important item on the government agenda