GDPt GE = t

where

1 k + d 1i 1i GDPt i 1t + GE + ..(1) 2 i =1 2i 2i t i 2t

GDPt = Real Gross Domestic Product at time t. GEt = Aggregate Government Expenditures at time t.

' s and ' s are the coefficients of GDPt and GEt respectively. 1t and 2t are error terms that are assumed to be white noise.
t is the time subscript The optimal lag length (k) of the VAR is determined by the Schwarz Information Criterion (SIC). The null hypothesis can be drawn as GEt does not Granger-cause GDPt if 1i =0 (first k coefficients are used in the computation of the Wald test) against the alternate hypothesis GEt does Granger-cause GDPt if 1i 0. Similarly, other hypothesis can be drawn between GDPt and GEt. The study is also aimed to investigate causality between different components of government expenditures1 and economic growth. The study formulates the following VAR (k+dmax) Model-2 for this purpose:

GDPt 3 DE t 4 k + d AE t = 5 + i =1 DS t 6 DFt 7
where

1i 2i 3i 4i 5i

1i 1i 1i 1t GDPt i 3t 2i 2i 1i 2i DE t i 4t AE t i + 5t ...(2) 3i 3i 1i 3i 4i 4i 1i 4i DS t i 6t 5i 5i 5i 5i DFt i 7t

DEt = Development Expenditures at time t. AEt = Administration Expenditures at time t. DSt = Debt Services at time t. DFt = Defense Services at time t.
1

Development Expenditures, Administrative Expenditures, Debt Services and Defense Services

 3 , 4 , 5 , 6 and 7 are constant terms in VAR (k+d) model. ' s, ' s, ' s, ' s, and ' s are the coefficients of GDPt, DEt, AEt, DSt and DFt respectively. 3t , 4t , 5t , 6t and 7t are error terms that are assumed to be white noise.