The Relationship between Total Production and Public Spending in Mexico: Keynes versus Wagner

Abstract

This paper studies the relationship between public spending and production in Mexico. It aims to assess the direction of causality between these two variables ranging from economic growth to public expenditure (Wagner hypothesis) or public spending to economic growth (Keynesian hypothesis). Annual time series for the period 1925-2014 of production and public spending in real terms (1970 based) and logarithms were used. The test method involved three steps: 1) unit root tests; 2) cointegration test of Engle and Granger and 3) evidence of causality in the Granger sense. The paper uses five different specifications recommended by the specialized international literature. It was found that the series are stationary with regards first differences and are cointegrated, so we can say there is a long-term relationship. Statistical tests of Granger causality indicated that the Wagner hypothesis does not hold, while the Keynes hypothesis is validated. The study concludes that public spending and its proper management is one of the keys to promoting economic growth in Mexico. Originality/value: Time series for a long-term period, based on official information, something not done previously, were developed. This allowed the results to be more reliable than those presented by other authors. In addition, a modern procedure of econometric estimation, allowing the assessment of the two proposed scenarios was used. The work is relevant in terms of the design of economic policy and the pursuit of development in Mexico.

The Relationship Between Government Spending and Economic Growth Revisited

“…On the other hand, Cavicchioli and Pistoresi (2016) and Afonso and Alves (2017) provide support for Wagner's Law in the case of developed economy. Several other studies that are in line with these findings include studies in developing countries by Ifa and Guetat (2018), for the case of Tunisia and Morocco, Kurniawati (2018) for the case of Indonesia and Sanchez-Juarez et al (2016) in the case of Mexico. In addition, the study in more developed countries by Magazzino (2010) in western part or Europe confirms the validity of the Keynesian hypothesis, in line with Wang et al (2016) for the case of eastern part of Europe.…”

Defence Expenditure–Government Debt Nexus in the Context of Sustainability in Selected Small European Union Countries

“…However, there is an inverse impact of economic growth on external debt. The investigation of Sánchez-Juárez and García-Almada [48] has revealed that public debt is positively correlated with public investment and that this generates economic growth. Kamran and Ahmed [49] evaluated the impact of military spending on external debt in highly indebted and low-income developing countries, such as India, Pakistan, Brazil, and the Philippines for the period between 1988 and 2010.…”

The Causal Nexus between Government Expenditure and Economic Growth: Wagner versus Keynes Hypothesis

“…Next, Keynes' theory is valid, as found in the studies of Babatunde [16], Ebaidalla [17], Karahan and C ¸olak [5], Pula and Elshani [18], Sanchez-Juarez et al [19], and Wang et al [20]. For instance, a study carried out by Ebaidalla [17] in Sudan from 1970 to 2008 found that only GE has a Granger causality to GDP in the short run.…”