Testing the Validity of Wagner’s Law in Bolivia: A Cointegration and Causality Analysis with Disaggregated Data

Antonio N. Bojanic

doi:10.4067/S0718-88702013000100002

Authors

Antonio N. Bojanic Universidad Nuestra Senora de La Paz

DOI:

https://doi.org/10.4067/S0718-88702013000100002

Keywords:

Wagner law, unit roots, cointegration, Error Correction models

Abstract

Nine versions of Wagner’s law are examined employing annual time-series data on Bolivia for the period 1940-2010. The analysis is an advance over previous work in several ways. First, the stationarity properties and the order of integration of the data are investigated using the Augmented Dickey-Fuller and the Phillips and Perron tests. Second, the hypothesis of a long-run relationship between different types of government expenditures and income is tested employing the methodology of cointegration analysis. Third, Error Correction Models are utilized to determine the direction of causality between the variables of interest. Lastly, the study comprises a period of seventy years, the longest of its kind for Bolivia. Consistent with Wagner’s proposition, bidirectional causality is found between income and government expenditures in six of the nine versions of the law.

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