Testing Wagner versus Keynes using disaggregated public expenditure data for Canada

Abstract

This paper attempts to test Wagnerian versus Keynesian hypotheses by examining the relationship between national income and total public expenditure as well as its various components for Canada during the period 1950–1995. Engle and Granger's two-step cointegration and error correction techniques are employed to test these two hypotheses. The results of this study support both the hypotheses when tested with broader aggregate expenditure data, i.e. total government current expenditure (CE) and total current expenditures on goods and services (CEGS). Although the results of this study do not support the existence of any long-run relationship between GDP and the disaggregated public expenditure variables, they do support the existence of short-run causation implying that national income may be causing or caused by a component of the total government current expenditure in the short run.