The relationship between government expenditures and economic growth: A Wagner's Law analysis for the Turkish economy (1998-2014)

In the literature, the relationship between goverment expenditures and macro-economic growth has been a great interest of theoretical and empirical works in terms of Wagner's Law approach. In this study, the relationship between government expenditures and economic growth has been examined for the period between 1998-2014. Quarterly data which have been obtained form Central Bank of Republic of Turkey are adapted. Engle-Granger Co-integration test, Johansen Co-Integration test, Error Correction Model and Toda Yamamoto Causality test were carried out to find relationship, if any, between government expenditures and macro-economic growth. With respect to the Engle-Granger Co-integration test; it is concluded that, variables which are center of the study, react to the shocks at the same time in the long-run and, have two meaningfull significant Co-integration relationship. Series react to the shocks at the same time, are subject to the shocks in short-run as well. We, have applied Error Correction Model, to find the tendency of short-run series realeasing form deviations and converge back to the long-term balance. This model showed that, series reacting togetter in the long-ron are like to converse back to its orginal level. According to the Johansen Co-integration analysis; at least, there is one Co-integration relationships (vector) between these two variables for Turkish economy. On the other hand, Toda-Yamamoto Causality analysis showed that, there is one-way causality relationship from economic growth to government expenditures. In conclusion, this study (thesis) reveals that, Wagner law is valid for the Turkish economy for the periods between 1998-2014. Keywords: Wagner's Law, Public Expenditure, Engle-Granger Co-integration, Johansen Co-integration, Error Correction Model, Toda-Yamamoto Causality.