An Application of a Johansen Cointegration Test and a Vector Error Correction, (VEC) Model to Test the Granger Causality between General Government Revenues and General Government Total Expenditures in Greece

In this article, we are investigating the effects of macroeconomic variables in terms of natural logarithmic yearly returns of general government revenues and general government total expenditures of Greece. We have applied a Vector Error Correction model, (VEC) a Granger causality and Johansen cointegration test to check for long – term relationship between general government revenues and general government total expenditures. By using a (VEC), model we have found that 62% of the disequilibrium or error term or speed of adjustment towards long-run equilibrium is corrected each year by changes in general government revenues. Error term accounted as 56% of the disequilibrium or speed of adjustment towards long – run equilibrium is corrected each year by changes in general total government expenditures. The speed of adjustment is not too fast for both variables. Moreover, we have found statistically significant long – run relationship between the general government revenues and general government total expenditures by using Johansen cointegration test. Finally, at the 5% significance level, we have found significant causality that the natural logarithmic yearly returns of the general government expenditures is a Granger causality of the natural logarithmic yearly returns of the general government total revenues and not vice versa. The data that we have used are natural logarithmic yearly returns starting from 01/01/1980 to 01/01/2018, which total to 39 observations. The data was obtained from the Statistical Department of the International Monetary Fund