Government spending and economic growth: a trivariate causality testing

Abstract

PurposeThis paper investigates whether institutional environment influences the relationship government spending and economic growth in ECOWAS over the period 2008–2017.Design/methodology/approachThe study adopts the recently developed panel vector autoregressive (PVAR) by Abrigo and Love (2015) and a two-step system generalised method of moment (GMM).FindingsThe results from the study show no evidence of either unidirectional or bidirectional causal relationship between government spending and economic growth in ECOWAS. Our findings reveal that government spending when associated with high level of corruption, oversized government and a waste of public resources will not cause economic growth.Originality/valueUnlike previous studies, we resolve the inherent problems of endogeneity and persistence in economic data. Likewise, we depart from existing studies that examined the causal relationship in a bivariate framework and adopt a trivariate causality testing.