Title: Nonlinearities in Wagner's law: further evidence from South Africa

Authors: Andrew Phiri

Addresses: Department of Economics, Faculty of Business and Economic Studies, Nelson Mandela Metropolitan University, Port Elizabeth, 6031, South Africa

Abstract: Recently, it has being speculated that the linear relationship between government expenditure and economic growth may be misspecified. In our study, we contribute to the literature by investigating a nonlinear expenditure-growth relationship for South Africa by applying threshold cointegration analysis to six variations of Wagner's law. Indeed, our empirical analysis reveal a nonlinear relationship between the time series for four out of the six versions of Wagner's law thus providing strong evidence of existing nonlinearities for the case of South Africa. We further find uni-directional causality running from government spending to output productivity with positive increases in government expenditure leading to improved GDP levels hence lending support to the Keynesian hypothesis. And yet, we also find that negative deviations from the steady-state are eradicated slower than positive ones hence implying that increases in government spending would be offset by negative shocks to the macroeconomy over the long-run. This implies that excessive spending by South African Government is not a panacea in overcoming the adverse effects of the recent global recession on the macroeconomy.

Keywords: Wagner's law; government spending; economic growth; threshold cointegration; South Africa; threshold error correction model; causality.

DOI: 10.1504/IJSE.2017.085066

International Journal of Sustainable Economy, 2017 Vol.9 No.3, pp.231 - 249

Received: 22 Jul 2016
Accepted: 21 Nov 2016

Published online: 10 Jul 2017 *

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