The long-run tendency of government expenditure: a semi-parametric modelling approach

The empirical findings concerning the validity of Wagner’s Law seem to depend on both economic fundamentals and modelling choices. Using a semi-parametric model and data for a sample of five developed and five developing countries during the period 1960–2007, we find that, for the developing countries, Wagner’s Law holds regardless of whether the relationship between government expenditures and per capita income is modelled in a linear or a nonlinear fashion. For the developed countries, however, model specification matters: If a linear specification is a priori chosen, then we find support of Wagner’s Law, while a nonlinear specification implies on the contrary the opposite result. Hence, model misspecification could have led to incorrectly accept Wagner’s law for the developed countries.