S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Research Institute of Industrial Economics (IFN) Working Paper Series

No 818:
The Futile Quest for a Grand Explanation of Long-Run Government Expenditure

Dick Durevall () and Magnus Henrekson ()

Abstract: This paper carries out a critical reappraisal of the two contending theories purporting to explain long-run government spending: Wagner’s Law and different variants of the ratchet effect. We analyze data spanning from the early 19th century until the present day in Sweden and the United Kingdom. Hence, in contrast to previous studies, we evaluate the validity of Wagner’s Law and the ratchet effect hypothesis over a very long time period, starting at the beginning of industrialization. Cointegration analysis is used to investigate the long-run relationships between government expenditure and GDP, focusing on sub-periods and structural breaks. Moreover, we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment. According to our main results, Wagner’s Law does not hold in the long run, although the data are consistent with Wagner’s Law between roughly 1860 and the mid 1970s. This can be traced to the formation of the modern public sector, including the introduction of public education, health care, and so forth. Yet Wagner’s Law did not hold during the initial industrialization phase (before 1860), and in recent periods GDP only affects the government spending share when we control for population age structure. Finally, we find some evidence of asymmetric adjustment in the UK, particularly in the post-WWII period. However, the ratchet effect is not a general cause of the growth of government spending.

Keywords: Displacement effect; Government expenditure; Growth of government; Public sector; Ratchet effect; Wagner’s Law; (follow links to similar papers)

JEL-Codes: H10; H55; I38; (follow links to similar papers)

41 pages, January 2, 2010, Revised October 28, 2010

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

wp818.pdf    PDF-file
Download Statistics
This paper is published as:
Durevall, Dick and Magnus Henrekson, (2011), 'The Futile Quest for a Grand Explanation of Long-Run Government Expenditure', Journal of Public Economics, Vol. 95, August, No. 7-8, pages 708-722



Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:iuiwop:0818 This page was generated on 2016-10-12 00:01:56