Government Revenue and Expenditure Nexus on OECD Countries with Panel Cointegration Approach (original) (raw)
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Czech Journal of Economics and Finance, 2009
This paper utilizes panel unit root, panel cointegration, and panel Granger causality test techniques to examine the inter-temporal relationship between government revenues and government expenditures in a panel of 15 OECD countries over the period 1992-2006. We find evidence of bidirectional causality between government revenues and government expenditures, supporting the fiscal synchronization hypothesis. The findings of this paper have important implications for fiscal policy decision-making in these 15 OECD countries after the signing of the EU Treaty in Maastricht on February 7, 1992. * The authors thank the referees for their several helpful comments, suggestions, and time spent in reading this paper. These all make this paper more valuable and readable. Any errors that remain are our own.
SSRN Electronic Journal, 2000
This paper utilizes panel unit root, panel cointegration, and panel Granger causality test techniques to examine the inter-temporal relationship between government revenues and government expenditures in a panel of 15 OECD countries over the period 1992-2006. We find evidence of bidirectional causality between government revenues and government expenditures, supporting the fiscal synchronization hypothesis. The findings of this paper have important implications for fiscal policy decision-making in these 15 OECD countries after the signing of the EU Treaty in Maastricht on February 7, 1992.
The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. The purpose of this paper is to investigate the relationship between government revenue and government expenditure in 40 Asian countries for the period of 1995 to 2008. We include GDP as a control variable into the model. Data properties were analyzed to determine their stationarity using the LLC and IPS unit root tests which indicated that the series are I(1). We find a cointegration relationship between government revenue and government expenditure by applying Kao panel cointegration test. The causality tests indicate that there is a bidirectional causal relationship between government expenditure and revenues in both the long and the short run and Fiscal synchronization hypothesis is confirmed. The policy implication of the results suggests that there is interdependence between government expenditure and revenues. The government makes its expenditure and revenues decision simultaneously. Under this scenario the fiscal authorities of these countries with budget deficits should raise revenues and decrease spending simultaneously in order to control their budget deficits. A sound fiscal policy is important to promote price stability and sustain growth in output and employment. Fiscal policy is regarded as an instrument that can be used to lessen short-run fluctuations in output and employment in many debates of macroeconomic policy. It can also be used to bring the economy to its potential level. If policymakers understand the relationship between government expenditure and government revenue, without a pause government deficits can be prevented. Hence the relationship between government expenditure and government revenue has attracted significant interest. This is due to the fact that the relationship between government revenue and expenditure has an impact on the budget deficit. The causal relationship between government revenue and expenditure has remained an empirically debatable issue in the field of public finance, (Eita & Mbazima, 2008). Over the Past three decades, a large number of studies have investigated the relationship between government revenue and government expenditure. This is not surprising given the importance of the subject matter in public economics; particularly the direction of causality has important implications for budget deficits. Understanding the relationship between government revenue and government expenditure is important from a policy point of view, especially for Asian countries, which is suffering from persistent budget deficits. The focus of this paper is to examine the intertemporal relationship between government revenues and government expenditures for a sample of 40 Asian countries and it tests whether government revenue causes government expenditure or whether the causality runs from government expenditure to government revenue, and if there is bidirectional causality. This discussion is very important since it corroborates the size of government, budget deficit and the structure of taxation and expenditure themselves. The rest of the paper is organized as follows. In the next section, we explain the overview of the theoretical literature for analyzing the government revenue and government expenditure relationship, section 3 is the review of the empirical literature. The data described in section 4, methodologies explained in section 5. In the last section, we discuss the empirical results and final section provided concluding remarks and some policy implications. 2. Theoretical Literature Review The causal relationship between revenues and government expenditure is a classic problem of Public Economics. There are four propositions that can potentially explain observed spending-revenue behavior. The propositions are briefly discussed as follows: Friedman leads the tax-and-spend school, which contends that raising taxes will simply lead to more spending. Friedman (1982) [cited in Narayan (2005: 1205)] puts his point in the following way: " You cannot reduce the deficit by raising taxes.
The causal and cointegration relationship between government revenue and government expenditure
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This study determines the causal relationship that exists between government revenue and government expenditure in South Africa. The study employed annual time series data from the year 1980 to 2015 taken from the South African Reserve Bank. The Johansen multivariate method was employed to test for co-integration and for causality the Vector Error Correction/Granger causality test was employed. The empirical results suggest that there is a long-run relation-ship between government revenue and government expenditure. The causality result suggests that there is no causality between government revenue and government expenditure in South Africa. Thus, policy makers in the short run should determine government revenue and government expenditure of South Africa independently when reducing the budget deficit.
Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries
SSRN Electronic Journal, 2000
We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration -absence of sustainabilitybetween government revenues and expenditures for most countries (except
2009
This paper uses cointegration and causality frameworks with endogenously determined structural breaks in an attempt to disentangle the dynamic and causal relationship of Turkish government spending and revenue patterns for 1950-2007 period. In the study, we first employ various forms of unit root tests with and without structural breaks in determining the degree of integration in the series and find that the series are compatible with the cointegration technique. In the second part, we employ various forms of cointegration techniques including conventional Engle-Granger and Gregory-Hansen method with endogenous structural breaks with several alternative lags in the model and found that in general the long term behavior of government revenue and expenditures follow a common stochastic trend and the result is very robust i.e. neither the existence of the structural break nor the selection of lag significantly affects the outcome. Finally, we found that the fiscal synchronization hypothesis suits well for the public finance behavior of Turkish government in the last fifty years.
The Economic Research Guardian, 2022
This article examines the long-run two-way causal relationship between government revenues and spending and their interaction with the yearly change in public debt for eighteen OECD countries by using annual data for 1976-2017 period. The empirical literature has mainly focused on the long run relationship between government expenditure and revenues or other single country time series while only a few studies have used panel causality analysis and none have investigated the link with the evolution of public debt ratios. The purpose of this paper is to present a dynamic model identifying the underlying relationships constituting the fiscal policy set-up in sample countries. We apply a robust dynamic panel causality methodology based on SUR systems and Wald tests with country specific bootstrap critical values. The study also aims to provide the basis for recommendations on the policy response to public finance challenges stemming from exogenous shocks like the global pandemic that began in 2020. By developing an enhanced analysis of the long-term causal relationship between taxation, spending and their interaction with changes in public debt, the study not only provides fresh insights into the sustainability and optimal design of fiscal adjustment efforts but also offers a country-specific schematization as a guide for policymaking.