TITLE:
The Effect of Federal Government Size on Long-Term Economic Growth in the United States, 1791-2009
AUTHORS:
Federico Guerrero, Elliott Parker
KEYWORDS:
Long-Term Economic Growth; Federal Government Size; Wagner’s Law; United States; Cointegration; Granger Causality; Vector Autoregression; Vector Error Correction Model
JOURNAL NAME:
Modern Economy,
Vol.3 No.8,
December
31,
2012
ABSTRACT: We consider whether there is statistical evidence for a causal relationship between federal government expenditures and growth in real GDP in the United States, using available data going back to 1791. After studying the time-series properties of these variables for stationarity and cointegration, we investigate Granger causality in detail in the context of a Vector Error Correction Model. While we find causal evidence that faster GDP growth leads to faster growth in government spending, we find no evidence supporting the common assertion that a larger government sector leads to slower economic growth.