TESTING THE VALIDITY OF WAGNER’S LAW IN PAKISTAN: AN APPLICATION OF ARDL COINTEGRATION TECHNIQUE

Ahmed Raza Cheema, Mazhar Iqbal

Abstract


    This study examines the validity of Wagner’s law by employing
the ARDL cointegration technique for the period 1976 to 2013 in
Pakistan.This study also checks the causality between government expenditureand real gross domestic product (RGDP) by applying Engle Granger approach. The results show that the Wagner’s law holds in Pakistan. The other main determinants of expenditure are trade openness, exchange rate and financial development. ECM coefficient is negative and statistically significant showing that short run dynamics converge towards equilibrium. The results of causality depict that there is unidirectional causality that runs from growth to expenditure, and not from public expenditure to growth. The policy implications of these results are that the government should be careful about its spending in future because the continuous increase in public
expenditure can lead to further worsening of the budget deficit.

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