Cointegration, Causality and Augmented Wagner's law: New Evidence for the Iranian Economy

Wagner law is the first model of government expenditures in the public finance literature. In addition to testing the traditional version of Wagner's law, also the augmented version of this law, which is introduced by Murthy (1994) is examined in order to find a long-term relationship between government spending and economic development in Iran. The main objective of this study is to evaluate a short-term and long-term relationship between government expenditures (per capita) and GDP (per capita) using annual data for the Iranian economy during the period 1392-1357. Therefore, in this article, the validity of this relationship is checked by six different formulations of the Wagner Law (the desire to increase government spending by economic growth), and the causality between variables are considered with using boundary F-test and error correction model (ECM). Among the studied models, the Wagner law is executable in terms of income elasticity only in Peacock and Musgrave version and in generalized version. The results of the Bound Test indicate that long-term relationship between the variables exists in three versions of Wagner’s law. In addition, causality test with using an error correction model represents a one-way path from the income on government spending for short periods in five models. Overall, the results show that the Wagner law is confirmed in the third group of models for short-run in the Iranian economy.