To read this content please select one of the options below:

Wagner’s law and governments’ functions: granularity matters

Joao Jalles (Fiscal Affairs Department, International Monetary Fund, Washington, District of Columbia, USA)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 4 March 2019

369

Abstract

Purpose

The purpose of this paper is to assess the responses of different categories of government spending to changes in economic activity. In other words, the authors empirically revisit the validation of the Wagner’s law in a sample of 61 advanced and emerging market economies between 1995 and 2015.

Design/methodology/approach

The authors do so via panel data instrumental variables and time-series SUR approaches.

Findings

Evidence from panel data analyses show that the Wagner’s law seems more prevalent in advanced economies and when countries are growing above potential. However, such result depends on the government spending category under scrutiny and the functional form used. Country-specific analysis revealed relatively more cases satisfying Wagner’s proposition within the emerging markets sample. The authors also found evidence of counter-cyclicality in several spending items. All in all, the Wagner’s regularity seems more the exception than the norm.

Originality/value

While in the literature on the size of the public sector with respect to a country’s level of economic development has received much attention, the authors make several novel contributions: since some economists criticized Wagner’s law because of ambiguity of the measurement of government expenditure (Musgrave, 1969), instead of looking at aggregate public expenditures, the authors go much more granular into the different functions of government (to this end, the authors use the Classification of Functions of the Government nomenclature). The authors check the validity of the Law via an instrumental variable approach in a panel setting; after that, the authors take into account the phase of the business cycle using a new filtering technique to compute potential GDP (output gap); then, the authors cross-check the baseline results by considering alternative functional form specifications of the Law; and finally, the authors look at individual countries one at the time via SUR analysis.

Keywords

Acknowledgements

The author of this article has not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.

Citation

Jalles, J. (2019), "Wagner’s law and governments’ functions: granularity matters", Journal of Economic Studies, Vol. 46 No. 2, pp. 446-466. https://doi.org/10.1108/JES-02-2018-0049

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

Related articles