Wagner VS Keynes: A cointegration analysis of Pakistan

Abstract

Abstract The real GDP and government consumption expenditures have been a popular discussion by several macroeconomists. Most of them were Wagner, Keynes, and others. The current study intuitively investigated Wagner's and Keynesian law's applicability to Pakistan from 1970 to 2021. Six versions of Wagner's law likewise Peacock-Wiseman (1961), Pryor (1968), Musgrave (1969), Goffman (1968), Gupta-Michas (1967), and Mann (1980) have been tested. The empirical results of the OLS model endorsed that Wagner’s Law is applicable to its variants like Peacock-Wiseman (1961), Pryor (1968), Goffman (1968), Gupta-Michas (1967), whereas Musgrave (1969), and Mann (1980) are inapplicable for Pakistan. To investigate the long-run cointegration of each Wagner version, the Johansen and Juselius (1990) cointegration test has been used. For all formulations of Wagner's law, cointegration does not exist. The Granger causality result revealed that only three versions have bi-direction causality and favored the Keynesian rule. The results differ from Wager’s rule. The study conveys the message to the policymaker that formed a set of comprehensive policies for the increase in general government final consumption expenditure toward an increase in national income. Developing countries should follow the Keynes law. JEL Code: C10, H50, O10, O54