Effect of public spending on economic growth by country groups according to income level: a cointegration analysis with panel data

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Published: Feb 5, 2022

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María Montaño
Carrera de Economía, Universidad Nacional de Loja, Loja, Ecuador
Michelle López-Sánchez
Carrera de Economía, Universidad Nacional de Loja, Loja, Ecuador

Abstract

The objective of this research is to examine the causal link between public spending and economic growth in 112 countries during 1980-2016. First, we use the Pedroni (1999) and Westerlund (2007) cointegration test to find equilibrium and the Dumitrescu and Hurlin (2012) tests to verify the direction of causality between the series. We estimate the strength of the cointegration vector for individual countries using a Dynamic Ordinary Least Squares (DOLS) model for groups of countries using a Dynamic Panel Ordinary Least Squares (PDOLS) model. The results of the GLS model show evidence in favor of Wagner's Law (1877). By applying the cointegration test, we verify the existence of a long-term equilibrium between the two variables. In addition, the existence of a unidirectional causality that goes from public spending to economic growth in high-, upper-middle, and low-income countries, and bidirectional causality in low- and extremely low-income countries, was found.

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Montaño, M., & López-Sánchez, M. . (2022). Effect of public spending on economic growth by country groups according to income level: a cointegration analysis with panel data. Revista Económica, 9(2), 79–91. Retrieved from https://revistas.unl.edu.ec/index.php/economica/article/view/1212
Issue
Vol. 9 No. 2 (2021): RVE Vol 9 (July - December 2021)
Section
RESEARCH ARTICLES
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