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Finance Review

A Time-Series Analysis of the Relationship Between Government

Expenditure and Gdp in Canada
Panayiotis C. Afxentiou and Apostolos Serletis
Public Finance Review 1991 19: 316
DOI: 10.1177/109114219101900303

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 The objective of this article is to test statistically in the Granger-Sims sense for the
causality between government expenditure and gross domestic product
existencein ofCanada
(GDP) over the
period 1947 to 1986. From a brief examination of the

prevalent theories of government growth, Wagner’s law emerges as the most com-
prehensive hypothesis and is subsequently subjected to causality tests. Unequivo-
cally, Wagner’slaw is rejected, but the reverse causality, which runs from govern-
ment spending to GDP, is rejected as well, thus contradicting the claims of effective
fiscal activism that emanate from the Keynesian paradigm. These results are
indicative of the complexity of forces that influence government behavior and should
be viewed not negatively, but rather as a challenge for more imaginative future
research in this highly important area.

A TIME-SERIES ANALYSIS OF THE

RELATIONSHIP BETWEEN GOVERNMENT
EXPENDITURE AND GDP IN CANADA

PANAYIOTIS C. AFXENTIOU
University of Calgary
APOSTOLOS SERLETIS
University of Calgary

classical
Public finance had a highly normative orientation in the
system, and was by and large at the periphery of
economics. Even though the Wealth of Nations advocated government
intervention on a number of occasions, Adam Smith and the other
classical economists, due to their distrust of government, favored a
small public sector and relied on private initiative to generate growth.
Until Keynesianism became the economic orthodoxy, government
functions were justified on their own merit rather than in the context
of the behavior of the entire economy. The post-World War II relative
increase in the size of the public sector was a reflection of the
acceptance of expansion of government responsibilities, especially in
AUTHORS’ NOTE: The authors gratefully acknowledge the helpful comments of two anony-
mous referees, who naturally bear no responsibility for any remaining deficiencies of the article.

PUBLIC FINANCE QUARTERLY, Vol. 19 No. 3, July 1991 316-333

C) 1991 Sage Publications, Inc.
316

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 317

the area of economic stabilization. Recent developments in theory that

center around rational expectations and emphasize the fast adjust-
ments of the private sector to the ever-changing economic conditions
tend to undermine the stabilization functions of government and throw
public finance back into the classical stream of thought.
To the extent that government mainly responds to the aggregate
level of economic activity and acts as a stabilizer, statistically the
causality is expected to flow from government to gross domestic
product. However, if the other government functions happen to be
more important than the stabilization function, the aforementioned

causality is obscured and other explanations of government behavior

are required. These explanations do not treat the public sector in
isolation as a totally independent entity with a life of its own, but rather
as an organic part of an evolving economic structure that necessitates
a change in the size and structure of government so that its role is

brought into harmony with the rest of the economy. It is as if the public
sector were forced under these circumstances to adapt to its environ-
ment, rather than to create its own environment, and in the process to
become an indispensable part of an integrative and constantly meta-
morphosed economy. In these cases the causality is expected to flow
statistically from gross domestic product to government expenditures.
The purpose of this article is to carry out causality tests for Canada
over the period 1947 to 1986 to determine whether nonrejectable

hypotheses can be established. Before these tests are discussed, a brief

reference to the main theories of government growth is made, from
which Wagner’s hypothesis (&dquo;law&dquo;) emerges as the dominant theory.
The six common versions of this law that are applied to Canadian data
are then outlined. Subsequently the model itself is presented and the
issues of stationarity and the methods of lag-length selection employed
are explained. Finally, after the presentation of the statistical results,
some concluding remarks are offered.

THE MAIN THEORIES OF GOVERNMENT SPENDING

Owing to the intermixture of a multitude of political and economic

influences on government fiscal behavior, any taxonomic scheme

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318

regarding the theories of government expenditure is liable to partially

violate strict methodological criteria and involve a marginal degree of
arbitrariness. With this caveat in mind, the principal models used in
the explanation of the relative increase of the public sector over time,
especially in the postwar period, can generally be classified under four
categories: (1) Wagner’s law, (2) the displacement effect, (3) the
productivity lag theory, and (4) the theory of bureaucracy.
Adolph Wagner (1883, 1893) realized the increasing complexities
of industrial growth and hypothesized that in response to them the
areas of responsibility of a progressive and active state, which has
tastes and preferences of its own but also adjusts to the requirements
of society, were destined to expand.’ Tax revenue was not envisaged
by him except for short periods, to restrict the expansion of the relative
size of the public sector,’ which he assumed to always be in equilib-
rium. Wagner’s ideas were presented in a rather broad and often
confusing manner. Yet in contrast to this drawback, they are method-
ologically attractive because of their simplicity, in that they portray
government spending as dependent on only one factor, namely, GDP
or GDP-per-capita, with an elasticity larger than unity. Wagner’s law
thus encapsulates the intricate relations of the sociosphere that affect
government expenditure in the simplest possible way, and in this it
meets a fundamental requirement of scientific inquiry.’
The dominance of Wagner’s law in empirical work is not just a
reflection of its broad scope and the methodological virtue of its
simplicity but also a consequence of certain major flaws that plague
the other three hypotheses. Specific flaws are the reliance of the
displacement hypothesis (Peacock and Wiseman 1961) on the elusive-
ness of tax tolerance, which is adjusted by flexible inspection effects
that are triggered by arbitrarily defined social upheavals&dquo;; the expla-
nation by the productivity lag theory (Baumol 1967) of the growth of
government expenditure in nominal instead of in real terms; and the
limitations of the theory of bureaucracy regarding its testability and
its focus on the residual that conventional demand forces fail to explain
(Borcherding 1977) rather than on the totality of government spend-
ing. All are serious defects that undermine the theoretical foundations
of these hypotheses and by comparison enhance the scientific status
of Wagner’s law, which lies at the center of our statistical tests 5

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 319

VERSIONS OF WAGNER’S HYPOTHESIS AND

THEIR APPLICATION TO CANADIAN DATA

Wagner stated his ideas rather vaguely and in ways that do not
always correspond precisely to contemporary economic terminology.
As a consequence, different interpretations appeared that led to six
formulations of his hypothesis (Gandhi 1971; Mann 1980). These
versions are:

GE =
AGDP)
GCE =
f(GDP)
GE =
/(GDP/N)
GE/GDP = f(GDP/N)
GE/N =
/(GDP/N)
GE/GDP = AGDP)
where GE stands for government expenditures, GCE for government
consumption expenditure, and N for population.
Functional form GE =AGDP) could be called the Peacock-Wiseman
version because they charted public spending against income and
tested visually that relationship through time. Version GCE = f(GDP)
is considered by Pryor (1968) to exemplify Wagner’s spirit. Formula-
tion GE = f(GDP/N) represents Goffman’s (1968) interpretation;
version GE/GDP = f(GDP/N) is favored by Musgrave (1969) and
many other empirical researchers; version GE/N = f(GDP/N) is linked
with Gupta (1967) and Michas (1975); and GE/GDP = ftGDP) is
referred to as the &dquo;modified&dquo; Peacock-Wiseman share version by
Mann (1980).
All six versions are subjected to causality tests that run from the
independent to the dependent variable according to Wagner’s hypoth-
esis, and are compared with the reverse causality that is consonant
with the Keynesian paradigm of fiscal stabilization.6 The data used are
obtained from CANSIM minibase and cover the period from 1947 to
1986. The choice of period was made so that only years of normal
peaceful economic growth are included as envisaged by Wagner.
Another reason for using this period is that it represents the time of
popularity of Keynesian stabilization ideas, which are also tested for
causality. The justification for the exclusion of depression, the war,
and its aftermath should, therefore, be seen in terms of the preceding

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320

comments. It should also be noted that the data for government

spending represent exhaustive expenditures. Transfers are excluded
because it is felt that their exclusion, according to Ram (1987), is truly
compatible with Wagner’s ideas.’But further to this, the issue as to
whether they should be excluded or not in measuring government
activity is not decidedly resolved in the literature. For example, Bird
(1970, 18) and Musgrave and Musgrave (1984, 134) argue that the
inclusion of transfers overstates the size of government expenditure,
whereas Buchanan and Flowers (1987, 63) see no useful purpose
served by the distinction between productive expenditures and trans-
fers, and favor the incorporation of the latter into aggregate govern-
ment spending. Our decision to exclude transfers must be seen in light
of the above absence of consensus and in the context of Wagner’s
entire conceptual framework. Admittedly this approach excludes from
consideration certain highly significant features of the leveling spirit
of the postwar period in Canada, even though the analysis provides
some clues regarding the importance of transfers whose administrative
costs are included in government expenditure and do therefore impact
in their own way on the overall government spending behavior.
Causality tests are performed regarding the aggregate expenditure
that pertain to all levels of government in Canada. In the true spirit of
Wagner’s law, causality tests between GDP and components of gov-
ernment expenditure follow the prior establishment of causality be-
tween GDP and aggregate spending. This reflects the fact that Wagner
was more concerned with the evolution of aggregate expenditure

during the industrialization process than being indiscriminately pre-

occupied with every category of government spending. His hypothesis
would not have attracted much attention if he had dealt only with parts
of expenditure and neglected the overall picture of government spend-
ing. Of course, his analysis was extended to the sources that were
deemed responsible for the predicted relative increase in government
size. Undoubtedly the time behavior of classes of expenditure and their
comparative contribution to the growth of government represent an
interesting topic in itself to be examined in a future article. For the
purpose of this article we therefore decided not to expand the analysis
to causality at the disaggregate level, but to restrict the causality tests
to the aggregate level. As for the use of GDP instead of GNP (gross

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 321

national the criterion of choice was based on the fact that

product),
Wagner concerned
was with the economic activity as it was unfolding
within the boundaries of Prussia and consequently corresponds to the
former rather than to the latter concept. The high correlation between
the two concepts is a clear indication that, as a rule, it proves imma-
terial which concept is used in most empirical studies.

THE GRANGER-SIMS CAUSALITY

MODEL AND STATISTICAL ISSUES

A necessary condition for testing the direction of causality between

government expenditure and GDP, in the sense of Granger (1969)-
Sims (1972) is that the relevant information is entirely contained in
the present and past values of these variables. A specification that
suggests itself based on the six versions of Wagner’s law is:

where

X~ =
log GE, log GCE, log GE/GDP, or log GE/N
y, =
log GDP or log GDP/N
u, = a disturbance term.

To test if Y, causes X, in the Granger-Sims sense, equation (1) is

estimated by ordinary least squares and the unrestricted sum of
squared residuals, SSRU, is obtained. Then another regression equation
is estimated under the restriction that all (3¡’s are zero, from which the
restricted sum of squared residuals, SSR&dquo; is obtained. If u, is a white
noise, the statistic computed as the ratio of (SSR,- SSRu)/s to SSR./
(n - r - s - 1) has an asymptotic F distribution with s degrees of
freedom in the numerator and n - r - s -1 degrees of freedom in the
denominator where n is the number of observations and 1 is subtracted
out to account for the constant term in equation (1). If the null
hypothesis cannot be rejected, the conclusion is that the data do not
show causality. If the null hypothesis is rejected, the conclusion is that

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322

the data do show causality. The lag lengths on both the dependent
variable and the potential causal variable are to be determined. The
methods employed for the determination of these lags are explained
after the issue of stationarity is briefly analyzed.
As just mentioned, the asymptotic F distribution of the said statistic
requires that the disturbance u, in equation (1) be a white noise. Awhite
noise is a serially uncorrelated process. However, many economic
time series are nonstationary rather than stationary and must, there-
fore, be appropriately transformed so that the statistical condition of
white noise for u, is satisfied.
Such transformations, or filtering of the data, are ultimately decided
by a process of evaluation of the time-series properties of the variables
involved. In this process, a variable that tends to return to its mean
level through time is said to be stationary. However, as Nelson and
Plosser (1982) have shown, most economic time series are not station-
ary in this sense. Instead, they are either &dquo;trend stationary&dquo; (TS)-
showing positive or negative growth over time - or &dquo;difference sta-
tionary&dquo; (DS) - stationary in first- or higher-order differences. To
determine whether the time series used here belong to the DS or to the
TS class of models, one informal testing procedure was employed
along with one formal test.
As an informal first step, the autocorrelation functions for each of
the time series in both level and first-difference form were calculated
(see Table 1). For the level form, sample autocorrelations were found
to be large and to decay slowly for GE, GCE, and GE/N. For the
first-difference form, the sample autocorrelations for the same vari-
ables were found to be positive and significant at lag one, but in most
cases they were not significant at longer lags. These findings suggest
that GE, GCE, and GE/N belong to the DS class of models.
Our formal test for the hypothesis that the time series belong to the
DS class against the alternative that they belong to the TS class
involved Dickey-Fuller unit root tests similar to those in Nelson and
Plosser (1982) based on the equation

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6
co
s
v-
T
ii
0 F
r_ a
0
a m
0
Q)ir=8
tE c0
00
c
(13
’S 2
0 8O
00 u
(0
.2
1r ?
4 72
2 0
Q. t
E
0 L
M
m

x L:l
uim
-i W
H
0
Fa- z

323

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324

where L is the lag operator and e, is a stationary series with zero mean
and constant variance. Specifically, we tested the joint null hypothesis
that 8, = 1 and y = 0 with univariate autoregressive models for each
data series. Under this null hypothesis, Dickey and Fuller (1979)
provide tabulations of the distribution of thet ratio for 81, denoted Z,
for testing the null hypothesis 6, 1. It should be noted that they do
=

not develop a statistic for the joint test or for y alone. However,
according to Nelson and Plosser (1982, 144, fn. 8), testing for 6, = 1
is sufficient for the models considered here.’
These results are reported in Table 2 for the case in which an
autogregressive process of order 2 is assumed. Using the distributions
tabulated by Fuller (1976, Table 8.5.2) and based on a critical value
A

for the test statistic i(8) of -3.50 corresponding to the 5% significance

level for a sample size of 50, we failed to reject the hypothesis that the
data have unit roots for GE, GCE, and GE/N. Hence the DS hypothesis
is accepted for GE, GCE, and GE/N, and the TS hypothesis is accepted
for GDP, GE/GDP, and GDP/N.
On the basis of the preceding formal and informal statistical find-
ings, we have used first-differencing of the natural logarithms of GE,
GCE, and GE/N and have detrended GDP, GE/GDP, and GDP/N, by
regressing the series against an intercept and a time trend, as a way of
removing nonstationarities.
Before performing the Granger causality tests, the lengths of lags
r and s had to be determined. In the literature r and s are frequently
chosen to have the same value, and lag lengths of 1, 2, or 3 are used
most often with annual data. However, such arbitrary lag specifica-
tions can produce misleading results as they may imply misspecifica-
tion of the order of the autoregressive process.
In practice the values of r and s are unknown and constitute
additional unknown parameters for which suitable values have to be
inferred from the data. One procedure for resolving this problem is to
choose among a wide variety of model selection criteria. These criteria
trade off the bias associated with a parsimonious parameterization
against the inefficiency associated with overparameterization. Of
course, different criteria give different weight to the bias-efficiency
trade-off and select quite different lag structures.

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 L.:6

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326

Here, we tried three different commonly chosen lag lengths-1, 2,

and 3 years. In addition, two statistical criteria for specifying the lag
length were used. The first is Akaike’s (1974) information criterion
(AIC). By this method, the value of r and s is selected to minimize the
value of AIC, where AIC is defined as

AIC(q) = n log (SSR/n) + 2q (2)

where is the number of observations, q is the number of parameters

n

(q =
1), and SSR is the sum of squared residuals.
r + s +

The second criterion is Schwarz’s (1978) criterion, defined by

SC(q) = n log (SSR/n) + q log n (3)

where, as above, n is the number of observations and q is the number

of parameters. Again, the appropriate order of the model is determined
by that value of q at which SC(q) attains its minimum value. The
minimization of SC leads, in general, to lower model orders than those
obtained by minimizing AIC.9
The above criteria were applied separately to determine the dimen-
sion of equation (1). However, minimizing equations (2) or (3) with
respect to the different lag structures can be computationally pro-
hibitive. To minimize the computational difficulties, the following
sequential procedure was employed. First, either equation (2) or
equation (3) was used to determine the optimal order of the one-
dimensional autoregressive process for X, alone. Second, after the
lag structure for X, at the optimal lag order was fixed, either equation
(2) or equation (3) was used to specify equation (1). In all cases, ten
was set to be the maximum number of potential lags for each variable.
The lag-length selection results are reported in brackets in Table 3.

TESTS OF GRANGER CAUSALITY

Because we are interested, among other things, in the sensitivity of

causality test results to various lag-length specifications, F tests for
Granger causality were performed on the three different, ad hoc lag

Downloaded from pfr.sagepub.com at OLD DOMINION UNIV LIBRARY on June 23, 2014
 vi
m
!
0
Q.
a~
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SU)
2
2
0

!o
T5<
s
0)
’~ m
>~
ob
m
’0
c
U)
0 0
0 ~z
0
a
0
E
t
4)
0
- ._m
ca cNa vi >
4) a)>
Z

~ E~LM’° E (D
i
0 0a)CCL
0) <D Q)
7
0
0
~~.!==
0 S -~N ~O2 ~r
=p
cm
c
C0~ M0~
l0 U) ,~-

a (D
0 ~Mgf~ U ~7 (n LL U t
0
mo

H0
cm
N ~ O n1
co

!~ U)
C -0
Earn&dquo;
W
J 3 ~0 > &horbar;t
m z < c~z
19 cd ~6 6 ~6
327

Downloaded from pfr.sagepub.com at OLD DOMINION UNIV LIBRARY on June 23, 2014
328

lengths - 1, 2, and 3 years-and on the AIC and SC lag structures.

This was done twice: first with the variables expressed in nominal
terms and second with the variables expressed in real terms. The F
ratios along with their p-values are presented in Table 3.
Several stylized findings arise from Table 3. Clearly, the F ratios
(and therefore the causality relationships) are not in general very
different when the variables are expressed in nominal terms than when
the variables are expressed in real terms. However, the causal relation-
ships become marginally less significant when the variables are ex-
pressed in real terms.
With respect to the lag-length specification options, the results
show that causal relationships are unquestionably sensitive to the lag
specifications. Looking, therefore, at the evidence based on the spec-
ification chosen by the AIC and SC criteria, the unequivocal verdict
is a resounding rejection of Wagner’s hypothesis in all six of its
versions. This rejection is particularly striking when the hypothesis is
cast in real terms. At the conventional 5% level all versions are
decisively rejected.
Overall the relationship between government expenditures and
gross domestic product as hypothesized by Wagner finds no statistical
support in Canada over the period from 1947 to 1986. This relationship
has been examined in the past by Gupta (1967), Bird (1970), Beck
(1981), Sahni and Singh (1984), and Ram (1986), among others. The
general conclusion reached in these studies is that the Canadian
experience supports Wagner’s law. However, except for Sahni and
Singh, who employ causality tests in their work, the other authors
either employ simple regressions or, as in the case of Bird, shy away
from the application of statistical techniques. Bird does so because of
his strong belief that the issues surrounding government spending
have not yet been sufficiently untangled nor the determining factors
clearly identified to justify their subjection to sophisticated statistical
tests. Thus the results of our study are only comparable to those of
Sahni and Singh, who found evidence of bidirectional causality be-
tween government spending and gross national expenditure. Our
findings contradict their conclusion.
The reasons for this difference may be attributed to a lesser extent
to the fact that their government expenditure data were not homoge-

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 329

neous because they were taken from different sources and for some
years they represented gross and for other years net magnitudes,
contrary to the homogeneity of data used in our study. But more
important, the time period covered by them was from 1926 to 1980
while the present study covers the period from 1947 to 1986, which is
free from two major disturbances, namely, the Great Depression and
World War II. These two major upheavals dictated a model specifica-
tion that took account of &dquo;displacement effects&dquo; in contrast to our study
that concentrates exclusively on Wagner’s hypothesis. As a conse-
quence of these differences, the data have been filtered differently in
converting the time-series variables into stationary ones that satisfy
the white noise requirement.
Ram’s (1986) study has some relationship to our study in that both
studies deal with causality. His conclusion was that in Canada from
1950 to 1980 there was a unidirectional causality from government
expenditure to income that was significant at the 10% level, but he
found no evidence of Wagner’s hypothesis. Again, this difference can
be attributed to the period covered, to the fact that his data were in
constant international prices, and to dissimilar model specification and
test procedures.

CONCLUSIONS

The outright rejection of Wagner’s law raises a fundamental issue,

to wit, whether there is really a credible fiscal theory of government.
The causality tests apparently indicate that neither Wagner’s law nor
the Keynesian perceptions of fiscal activism are valid.’° When these
two main theories fail to be substantiated, little confidence can be
placed in either the theory of bureaucracy (which anyway attempts to
explain only part rather than the of
totality government spending) or
in the productivity lag theory (which is based principally on the
relative price behavior of services vis-A-vis the rest of output and
consequently breaks down if constant wage units are used) as viable
alternatives explaining government behavior. Probably what appears
to happen with regard to government spending cannot be explained
by a single theory. Or, put differently, government expenditure is

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330

probably the result of ad hoc processes that fail to fall under a single
distinct pattern from which meaningful hypotheses can be derived.
What may be missing is a unifying force that brings the multifarious
influences on government budgeting together. That some influences
exhibit a degree of stability or that the ingrained forces and repetitive
nature of the budget processes produce budgets tending to be only
marginally different from one year to the next is undeniable. Yet these
phenomena, especially the latter, are better suited for building me-
chanical models that simply predict the size of budgets rather than for
building true theories that structurally explain and predict government
spending behavior.&dquo;
The search in social sciences is for stable and repetitive motiva-
tional patterns of behavior. In this article the search was restricted to
the domain of the public sector, and for the period covered Wagner’s
law was rejected when tested for aggregate exhaustive government
expenditure. This rejection should not be construed as the outcome of
some idiosyncratic peculiarities of the Canadian public sector, but as
a manifestation of government spending complexities in general that
result from the fact that government budgets are instruments designed
to deal as efficiently as institutionally possible with a host of ever-
changing economic, political, and social problems. These complexi-
ties certainly call for explanations and pose a continuous challenge to
public finance theorists. Part of that challenge is a comprehensive
study of the main components of public expenditure, including trans-
fers, and their relationship to aggregate spending over time that makes
use of the new statistical techniques of cointegration. This, however,
remains a project for us in the future.

NOTES

1. For a more detailed of the areas of government activity anticipated by A.

exposition
Wagner, the reader is referred to Bird
(1971) and Tarchys (1975).
2. Quoted in Musgrave and Peacock (1958, 8).
3. The virtues of simplicity are strongly praised by Friedman (1953). It is significant that
Wagner, either through luck or intuition, avoided the statistical traps of correlation between GDP
and other variables such as urbanization and population density used by Fabricant (1952) and
other researchers.

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4. From its original geometric representation as a sudden upward shift in government

spending, displacement was subsequently measured as a structural break (Diamond 1977). The
definition of a major social upheaval expanded from the two World Wars (Gupta 1967) to
"non-global" disturbances (Nagarajan 1979) to the Great Depression (Bonin, Finch, and Waters
1969), until eventually it was identified as anything that affects people’s attitudes toward the
public sector or toward economic development (Musgrave 1969; Mann 1975).
5. The popularity of Wagner’s law must be kept in proper perspective. As a hypothesis,
which claims that government spending exhibits a GDP elasticity larger than unity, it leads
inescapably to a total socialization of all resources, excepting the trivial case of an asymptote.
Therefore, its validity should be viewed as limited to a certain unspecified period of industrial-
ization. If in the course of advanced development the hypothesis is rejected, an easy escape is
to conveniently consider the countries covered as having entered the postindustrialization stage.
For an appraisal of the principal theories of public expenditures, see Afxentiou (1982).
6. The Keynesian paradigm has been used by neo-Marxists (Foley 1978) as another
explanation of the growth of government in capitalist economies in their perennial struggle
against secular stagnation.
7. Ram (1987) also cites the fact that the inclusion of transfers by other researchers has not
changed the results of cross-sectional empirical work done in this area. By contrast Beck (1979)
has argued that the minor relative growth of the public sector in most industrial countries is
largely due to the expansion of transfer payments, and Peltzman (1980) built a model of
government growth that centers on the prevalence of the leveling spirit of modern times.
8. An alternative procedure to testing for unit roots would be to use the Phillips and Perron
(1988) approach. This approach is robust to a wide variety of serial correlation and time-
dependent heteroskedasticity and accommodates models with a drift and a time trend so that it
may be used to discriminate between unit root nonstationarity and stationarity about a determin-
istic trend. While the Phillips-Perron test is robust to the presence of conditional heteroskedastic-
ity, Schwert (1987) points out that the Phillips-Perron tests reject the null hypothesis of a unit
root too often when the process under consideration contains a moving-average error. It seems
that our choice of the Dickey-Fuller test is a reasonable compromise.
9. For an excellent discussion of the relationship between these two criteria, see Priestly
(1981, 372-76).
10. The statistical causality results that reject the Keynesian paradigm are available on
request from the authors.
11. For such an early attempt aiming at predicting rather than explaining the underlying
forces of government spending, see Sharkansky (1967).

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Panayiotis C. Afxentiou is Professor of Economics at the University of Calgary, Alberta,

Canada. He has worked as a Research Economist with the Cyprus Government Planning
Bureau and as an Economic Advisor with the United Nations. His main research interest
is in economic development and public finance. His work has been published in
Developing Economies, Atlantic Economic Journal, Economia Internazionale, and
Canadian Journal of Development Studies.

Apostolos Serletis is Associate Professor of Economics at the University of Calgary,

Alberta, Canada, having also served as VsitingAssistant Professor of Economics at the
University of Texas at Austin. His main research interst is in the aggregation-and
microeconomic-theoretic foundations of monetary economics. He has published arti-
cles in Journal of Money, Credit and Banking, Journal of Macroeconomics, Journal of
Econometrics, and Journal of Business and Economic Statistics.

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