Wagner’s law vs. Keynes’ hypothesis in very different countries (Armenia and Spain)

Abstract There is considerable controversy in the economic literature concerning whether particular government expenditures have an impact on economic growth. This study analyzes the macroeconomic magnitude of government expenditures in Armenia and Spain and evaluates whether there exists a causal relationship between government expenditures and economic growth, and vice versa (Keynes’ hypothesis and Wagner’s law). The study employs the VAR methodology to analyze annual data for the years 1996–2014. By utilizing Granger causality tests, the study reveals whether the government expenditures are a significant factor in economic growth in short-term perspective. Finally, IRF and FEVD tests are applied to estimate the effects of a change in particular government expenditures on GDP for twelve year time horizon. This study validates the hypothesis that, irrespective of size and nature of the economy (Armenia vs. Spain), some public expenditures (e.g. healthcare) positively contribute to the growth of the economy, while social protection in both countries is negatively related to GDP.