Real Government Expenditure and Economic Growth in the Southern Caucasus Countries: A Panel Data Analysis

Abstract

The primary purpose of this paper is to find out the relationship between real government expenditures and real gross domestic product (GDP) for three countries of the South Caucasus namely, Azerbaijan, Armenia, and Georgia. The relationship between the variables is essential for policy formation for these countries due to their transition to market economy. There are two main hypotheses related to real government expenditures and growth. The Wagner’s hypothesis argues that the growth of an economy leads to more government spending while Keynes’s hypothesis proposes that government expenditures feed higher economic growth. From policy perspectives, the Keynesian view gives a dominant role in government intervention for higher growth while Wagner view gives just a passive role to the government in economic policy. This paper is designed to investigate these hypotheses by using econometric panel techniques. The analysis covers the years 1990-2016. According to our empirical results, there is a mutually positive relationship between real government expenditures and economic growth in the South Caucasus. At the same time, we also find short and long-term bidirectional causality. These results confirm each other and in line with the existing literature. Our study contributes to the literature as filling the gap by studying the South Caucasus countries.

Impact of Government Expenditure on Economic Growth In Sub-Saharan Africa: A Validity of Wagner’s Law

“…The study adopted the Error Correction Mechanism revealing that capital expenditure exerts negative effect on economic growth contrary to recurrent expenditure which had a positive effect on economic growth. Gumus and Mammadov (2019) examined the relationship between government expenditure and economic growth between 1990 and 2016 for three countries namely Azerbaijan, Armenia and Georgia. The study used pooled Ordinary Least square, ECM and causality techniques for analysis revealing that there exists a bi-directional causality between expenditure and growth.…”

Kamu Harcamalarının Ekonomik Büyüme Üzerindeki Etkisi: Wagner Yasası’nın ve Keynesyen Hipotez’in Türkiye'de Geçerliliği Üzerine Bir İnceleme

“…Methodology Two different models were identified for Turkey based on the model Atasoy and Gür (2013) applied for China and the model tested by Gumus and Mammadov (2019) for the South Caucasian countries. Time series econometrics methods were used, including Augmented Dickey Fuller (ADF) (1981) unit root test, Phillips-Ouliaris Cointegration test and error correction model Granger causality test.…”