The Nexus between Disaggregated Public Spending and GDP in the Euro Area

This paper aims to analyze the nexus between disaggregated public spending and GDP in the Euro Area for the period 1990-2010 at a disaggregated level, using a time series approach. We estimated this nexus for ten items of public spending according to the COFOG functional classification. Taking into account cross-section dependence and group-wise heteroskedasticity, cointegration tests reveal a long-run relationship between real per capita GDP and real spending for defence, for housing and community amenities, and for recreation, culture and religion. Moreover, Granger causality tests results show clear evidence against the Keynesian view (G→Y). Finally, decomposing the GDP with Hodrick and Prescott filter, Estonia, Luxembourg, Ireland and Greece exhibit wider fluctuations. Some notes on the policy implications of this analysis conclude the paper.