RE-EXAMINATION OF WAGNER’S LAW FOR OECD COUNTRIES

This paper investigates the relationship between government spending and economic growth. Economic theory generally expects a negative relationship between these variables for rich countries with large public sectors. However, empirical studies often cannot find a robust negative relationship and have provided mixed empirical evidence. In the case of the relationship between public expenditure and economic growth it appears that specification of econometric methods, data selection and time span could affect the findings and lead to contradictory conclusions. This paper utilizes a panel of cross-sectional and time series data for 16 OECD countries over the 1995- 2010 periods to reexamine the relationship between government spending and economic growth by conducting econometric panel study. We investigate the unit root properties and cointegration, long-run economic relationship, between government expenditure and economic growth to test the validity of Wagner’s Law. Our findings indicate that government spending exerts a positive and significant influence on economic growth and provide evidence for the validity of Wagner’s law.