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Wagner’s Law and the Dynamics of Government Spending on Indonesia

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  • Julian Inchauspe
  • Garry MacDonald
  • Moch Abdul Kobir

Abstract

The empirical relationship between public expenditure and economic growth can be analysed from different viewpoints. This study focuses on the empirical testing of the validity of Wagner’s law for the Indonesian economy. The high economic growth in the sample period of 1980–2014 makes the law likely to be applicable to Indonesia. Causality and cointegration techniques are used. A key finding in our vector autoregression analysis is unidirectional causality running from GDP and price to government expenditure, supporting Wagner’s law. In the case of price and government expenditure, this study also finds evidence of a long-run cointegrating relationship, which appears stable and supports unidirectional causality. The vast majority of the deviations from the equilibrium relationship between government expenditure and price are found to be transitory shocks to government expenditure. Most deviations also appear significantly countercyclical to economic activity, suggesting that government expenditure does play a role in economic stabilisation.

Suggested Citation

  • Julian Inchauspe & Garry MacDonald & Moch Abdul Kobir, 2022. "Wagner’s Law and the Dynamics of Government Spending on Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 58(1), pages 79-95, January.
    • Handle: RePEc:taf:bindes:v:58:y:2022:i:1:p:79-95
    DOI: 10.1080/00074918.2020.1811837
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    Cited by:

    1. Solikin, Akhmad & Nizar, Muhammad Afdi, 2022. "Government Revenue and Government Spending Nexus: A Testing Hypothesis for Indonesia," MPRA Paper 118556, University Library of Munich, Germany.
    2. Ciro Bazán & Víctor Josué Álvarez-Quiroz & Yennyfer Morales Olivares, 2022. "Wagner’s Law vs. Keynesian Hypothesis: Dynamic Impacts," Sustainability, MDPI, vol. 14(16), pages 1-25, August.

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