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Real Government Expenditure and Economic Growth in the Southern Caucasus Countries: A Panel Data Analysis

Corresponding Author

Erdal Gumus

Document Type

Original Study

Subject Areas

Political Science

Keywords

government expenditure, economic growth, Wagner’s hypothesis, Keynesian hypothesis, the Southern Caucasus countries, panel data analysis

Abstract

The primary purpose of this paper is to find out the relationship between real government expenditures and real gross domestic product (GDP) for three countries of the South Caucasus namely, Azerbaijan, Armenia, andGeorgia. The relationship between the variables isessentialfor policy formation for these countries due to their transition to market economy. Therearetwo mainhypotheses related to real government expenditures and growth. The Wagner’s hypothesis argues that growth of an economy leads more government spending while the Keynes’s hypothesis proposes that government expenditures feed higher economic growth.From policy perspectives, Keynesian view gives a dominant role ingovernment intervention for higher growth while Wagner view gives just a passive role to the governmentin economic policy. This paper is designed to investigate these hypotheses by using econometric paneltechniques. The analysis covers the years 1990-2016. According to our empirical results, there is a mutually positive relationship between real government expenditures and economic growth in theSouth Caucasus. At the same time, we also find short and long-term bidirectional causality. These results confirm each other and in line with the existing literature. Our study contributesto literature as filling the gap by studying the South Caucasus countries.

Publication Date

2019

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