Abstract:
This paper presents an empirical investigation into the validity of
Wagner‟s Law for Sri Lanka over the period 1959-2010. The research
methodology employed includes testing for unit root, with the
Augmented Dickey-Fuller (ADF) test, the use of a Vector Autoregression
(VAR) model for the implementation of the Granger causality test, and
cointegration tests according to Johansen-Juselious. The cointegration
tests indicate that there is a long run relationship between public
expenditure (TE) and Gross Domestic Product (GDP), and the ratio of
total government (public) expenditure to gross domestic product
(TE/GDP) and GDP (First and Six version of Wagner‟s Law). Both
eigenvalue and trace tests indicate that there is one cointegrating vector.
Although the results reported herein do not reveal uniformity among the
six versions of Wagner‟s Law, the results show an apparent prevalence of
the direction of causality from growth of GDP to public expenditure. For
the first three versions of Wagner‟s Law and the fifth version appear that
Granger- causality runs one-way from GDP to TE, GDP to Total
Consumption Expenditure (TCE), per capita gross domestic product
(GDP/POP) to TE, and (GDP/POP) to per capita government expenditure
(TE/POP), respectively. According to empirical findings of this study, it
is possible to say that the growth of public expenditure in Sri Lanka is
depended on and determined by economic growth as Wagner‟s Law
