Keynes Versus Wagner: Public Expenditure and National Income Case Study of Tunisia

Abstract

This study aims to investigate the relationship between public expenditure and economic growth in Tunisia spanning from 1965 to 2019. Primarily, the validity of Wagner's law and Keynes' hypothesis was tested through time series analysis of public expenditure and national income measures. The key findings suggest non-stationarity in the time series data alongside the existence of a cointegration relationship. Additionally, Granger causality testing within the error-correction model revealed bidirectional causality from national income to government expenditure, thereby confirming Keynes' hypothesis for Tunisia during the study period. Furthermore, nonlinear analysis of the Wagner version, employing the threshold model, lends support to this hypothesis, highlighting the presence of two thresholds over the study duration. These findings shed light on the relationship between public spending and economic growth in Tunisia. They offer important insights that can be useful for both policymakers and researchers alike.