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.
