Empirical investigation of the nexus between government expenditure and GDP growth in Kenya and testing of wagner’s law for the period 1960 - 2011

Abstract

This study examine d the relationship between the growth in Total Government Expenditure and GDP growth in Kenya and test ed the applicability of Wagner’s law using time series data for the period 1960 - 2011 . The study utilize d C ointegration and VECM techniques . Firstly, the study investigated the existence or otherwise of the long - run equilibrium relationship between the two variables by utilizing Johansen - Juselius Maximum Likelih ood Test (commonly referred to as the Johansen Cointegration Test). The results of Johansen Cointegration Test indicated the presence of a long - run equilibrium relationship between Real Total Government Expenditure and Real GDP in Kenya during the period under review. Secondly, the study sought to esta blish the direction of causality between the two variables. To establish the causality direction, the study utilized the Vector Error Correction Model (VECM). The results of the VECM indicated that there exists a long - run causality running from Real GDP to Real Total Government Expenditure. T he VECM results also revealed that there exists no short – run causality running in either direction. Finally, the study examine d the nature of the elasticity of Real Total Government Expenditure with respect to Real GDP. VECM results were utilized to identify the parameters of the cointegrating equation ( ce). The coefficient of the explanatory variable (GDP) in the cointegrating equation (ce) revealed that the elasticity of Real Total Government Expenditure with respect t o Real GDP is more than unity. T he results of Johansen Cointegration Test, the VECM and the nature of the elasticity of Real Total Government Expenditure with respect to Real GDP validate d Wagner’s law for Kenya during the period under review