We take the modern approach to studying the relationship between government expenditure and economic growth. First, we study the unit root properties of the variables. Next we examine whether the pair of variables have any long run relationship or not. Third, we study causality among the variables.
II. Theories of Public Expenditure
One can distinguish among three different theories about government spending. These are (1) the public choice theory of bureaucracy, (2) the displacement effect hypothesis and (3) Wagner’s Law.