Causality Between Public Expenditure and GDP Growth In Palestine: An Econometric Analysis Of Wagner’s Law

Abstract

This study aimed to explore the causal relationship between public expenditure and the GDP growth in the Palestinian territories over the period of 1994-2013. For this purpose trends in both public expenditure and GDP growth in Palestine are discussed, the paper also explored the relevant literature regarding  Wagner’s Law and the recent related empirical studies in various countries of the world. The study has adopted recent advances of econometric techniques. For this purpose, stationarity properties of the data and the order of integration of the data are empirically investigated by the Augmented-Dickey Fuller (ADF) test in the first place. Hypothesis of a long-run relationship between public expenditure and  GDP growth has been tested by Engle-Granger co-integration test. Depending on the co-integration results of the six versions of Wagner’s Law, the findings reveal that there is a co-integration between public expenditure and GDP growth. Such results indicate that there is a long-run relationship between public expenditure and GDP  growth for the Palestinian case. On the basis of the Granger causality tests, we also found that  both public expenditure and GDP  have a cause effect on each other, the findings also suggest that both public expenditure and GDP are growing substantially and hence validate Wagner’s Law in the case of Palestine. Kew Words: Public Expenditure, GDP Growth, Wagner’s La