Cointegration Analysis-Causality Testing and Wagner's Law The Case of Turkey, 1950-1990

This paper investigates statistically the existence of a long-run relationship between public expenditure and GNP (Wagner’s Law) using data for Turkey over the period 1950-1990. Recent advances in time series analysis have permitted the investigation of the long-run relationship between public expenditure and GNP in terms of cointegration analysis. In the case of Wagner’s Law, evidence of cointegration is sufficient to establish a long-run relationship between public expenditure and income. However, to support Wagner’s Law would require unidirectional causality from income to public expenditure. Therefore cointegration should be seen as a necessary condition for Wagner’s Law, but not sufficient. Hence, conditional on cointegration results, it is necessary to look at the causality properties of the model(s). Using the Engle and Granger cointegration test, the Granger Causality test and Turkish time series aggregate data for the period 1950-1990, we find no empirical support for Wagner’s Law.