Empirical investigation of the dynamic relationship between government expenditure and Economic growth in Sri Lanka

Abstract

This study examines the long run dynamic relationship between government expenditures and economic growth for Sri Lankan economy during the period from 1977-2009. The study tests the validity of the Keynesian view and Wagner's law in the case of Sri Lankan economy. The empirical evidence has been acquired through the co-integration, error correction model and the Granger causality tests. The empirical findings clearly suggest that there is a statistically significant positive long run relationship between government expenditure and economic growth in Sri Lanka during the sample period. The Granger causality test shows that causality runs from government expenditure to economic growth and vice versa, the relationship is positive and statistically significant. The empiridcal results of this study support the Keynesian view and Wagnerian law and the direction of causality is valid for Sri Lankan economy during the study period. These results have important policy implications for both domestic policy makers and the development partners working in Sri Lanka.