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Abstract
This study adopts a time series approach, which considers the nonstationarity property of data, to conducting empirical analysis of government size associated with Wagner's Law. Chapter Two examines Musgrave's version of Wagner's Law for Mexico. Using unit root and non-causality tests, evidence in support of Wagner's Law for Mexico can be clearly found. We show that the different temporal properties of the series must be carefully identified to obtain reliable results of non-causality tests.
Chapter Three (a) investigates the bidirectional impact between income and government size and (b) extends the empirical frontier of Wagner's Law to an open economy framework. We ascertain the bidirectional impact between income and government size within and across the G-7 countries. On an individual country basis, the prevalence of the bidirectional impact between income and government size is confirmed to a considerable extent. Thus, the results imply that income and government size are jointly determined. On examination of the two-country cases, a new international version of Wagner's Law is identified. We observe that a country's government size growth could positively depend on foreign income. On the other hand, we introduce an aggregate production externality concept to explain the phenomenon that the U.S. government size has a positive impact on foreign income growth. We surmise that an externality input associated with the U.S. defense expenditures might enter the foreign aggregate production function.
Chapter Four applies two distinct time-series techniques, linear feedback measures and error correction models, to examine the U.S. expenditures-receipts nexus along with the government size issue. In a nominal sense, the application of error correction models primarily confirms that total expenditures and total receipts are caused by each other and the application of linear feedback measures, a new attempt in the literature, suggests that control of total receipts might be the key to the effective control of government size. Finally, we conclude that empirical specification of government size whatever purpose should first consider the expenditures-receipts relation to ensure proper specification of government size.
