GOVERNMENT EXPENDITURES IN CHINA AND TAIWAN: DO THEY FOLLOW WAGNER¡¯S LAW?

Abstract

This paper tests Wagner¡¯s Law for China and Taiwan, using annual time series data covering the period 1979-2002. To estimate the long-run relationship between government expenditures and output, we use a robust estimation method known as the Bounds Test based on Unrestricted Error Correction Model (UECM) estimation (Pesaran et al. (2001)). Empirical results from the Bounds Test indicate that there exists no long-run relationship between government expenditures and output in China and Taiwan. Furthermore, Toda and Yamamoto¡¯s (1995) Granger non-causality test results also show that Wagner¡¯s Law does not hold for China and Taiwan over this same period.Wagner¡¯s Law, UECM, Bounds Test