Wagner's Law and Augmented Wagner's Law in EU-27 - A Time-Series Analysis on Stationarity, Cointegration and Causality

The relationship between public expenditure and aggregate income has long been debated in economic literature. According to Wagner, expenditure is an endogenous factor or an outcome. On the other hand, Keynes considered public expenditure as an exogenous factor to be used as a policy instrument to influence growth. “Augmented” version of Wagner's Law, where public deficit appears as further explanatory variable, is also investigated. The aim of this paper is to assess empirical evidence of these hypotheses in EU-27, for the period 1970-2009. After a brief introduction, a survey of the economic literature on this issue is offered, before evaluating some specifications of “Wagner's Law” due to several researchers. Few notes on the empirical evidence' comparisons conclude the paper