Validity of Wagner’s Law in Transition Economies: A Multivariate Approach

Abstract

We test the validity of Wagner’s law in transition countries using non-stationary panel estimators. First, we test cointegration between government final consumption expenditure and GDP, then we introduce the money supply as an additional explanatory variable. Finally, the Panel DOLS is used in order to estimate the long run relationship between the variables. According to our results, the government expenditure is an endogenous factor of an increase in national income. However, in observed economies in transition, there is reduction of public activity with the progress of the economy even in the case when a money supply is added.