Article

The Relationship between Total Production and Public Spending in Mexico: Keynes versus Wagner

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This paper studies the relationship between public spending and production in Mexico. It aims to assess the direction of causality between these two variables ranging from economic growth to public expenditure (Wagner hypothesis) or public spending to economic growth (Keynesian hypothesis). Annual time series for the period 1925–2014 of production and public spending in real terms (1970 based) and logarithms were used. The test method involved three steps: 1) unit root tests; 2) cointegration test of Engle and Granger and 3) evidence of causality in the Granger sense. The paper uses five different specifications recommended by the specialized international literature. It was found that the series are stationary with regards first differences and are cointegrated, so we can say there is a long-term relationship. Statistical tests of Granger causality indicated that the Wagner hypothesis does not hold, while the Keynes hypothesis is validated. The study concludes that public spending and its proper management is one of the keys to promoting economic growth in Mexico. Originality/value: Time series for a long-term period, based on official information, something not done previously, were developed. This allowed the results to be more reliable than those presented by other authors. In addition, a modern procedure of econometric estimation, allowing the assessment of the two proposed scenarios was used. The work is relevant in terms of the design of economic policy and the pursuit of development in Mexico.
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The Relationship between Total Production and Public Spending in
Mexico: Keynes versus Wagner
Isaac Sánchez-Juárez1, Rosa M. García Almada1 & Héctor Barajas Bustillos1
1 Department of Social Sciences, Universidad Autónoma de Ciudad Juárez, Chihuahua, México
Correspondence: Isaac Sánchez-Juárez, Economics’ program, Universidad Autónoma de Ciudad Juárez, Building B,
Chihuahua, México. Tel: 52-656-688-3835.
Received: November 25, 2015 Accepted: December 11, 2015 Online Published: January 04, 2016
doi:10.5430/ijfr.v7n1p109 URL: http://dx.doi.org/10.5430/ijfr.v7n1p109
Abstract
This paper studies the relationship between public spending and production in Mexico. It aims to assess the direction
of causality between these two variables ranging from economic growth to public expenditure (Wagner hypothesis)
or public spending to economic growth (Keynesian hypothesis). Annual time series for the period 19252014 of
production and public spending in real terms (1970 based) and logarithms were used. The test method involved three
steps: 1) unit root tests; 2) cointegration test of Engle and Granger and 3) evidence of causality in the Granger sense.
The paper uses five different specifications recommended by the specialized international literature. It was found that
the series are stationary with regards first differences and are cointegrated, so we can say there is a long-term
relationship. Statistical tests of Granger causality indicated that the Wagner hypothesis does not hold, while the
Keynes hypothesis is validated. The study concludes that public spending and its proper management is one of the
keys to promoting economic growth in Mexico. Originality/value: Time series for a long-term period, based on
official information, something not done previously, were developed. This allowed the results to be more reliable
than those presented by other authors. In addition, a modern procedure of econometric estimation, allowing the
assessment of the two proposed scenarios was used. The work is relevant in terms of the design of economic policy
and the pursuit of development in Mexico.
Keywords: Wagner hypothesis, Keynes, government expenditure, economic growth, Mexico
1. Introduction
This article examines the relationship between economic growth and public spending, a subject largely assessed by
many international researchers (see Bergh & Henrekson, 2011), which has relevance in terms of economic policy and
welfare. Specifically, what is being sought is to assess the validity of the empirical Wagner hypothesis (WH),
according to which between the variables above there is a direction of causality running from production to public
spending, this with data of the Mexican economy for the period 19252014.
For Wagner, the expansion of public spending is the result of economic development and never vice versa. If an
economy has rising government spending, the cause should seek in the improvement of revenues (product) of a
nation (demand). A growing economy receives pressures from society in favor of an increase in public spending, for
at least two reasons: 1) the more a society grows, becoming more developed, becoming complex, generating a
greater number of conflicts, this requires greater involvement of the government, which should regulate these
behaviors and seek solutions; and (2) the goods and public services are upper and elastic with respect to income
(product), which means that their income elasticity is greater that unit, small changes in the income of persons lead to
major changes in their demand (Magazzino, 2012: 891).
The WH contradicts the Keynes hypothesis (KH), according to which, both during a recession and economic boom,
fiscal policy (particularly public investment spending) is a desirable instrument, since it strengthens economic
activity. For those who are part of this paradigm, public spending is what determines national production, through the
Keynesian multiplier.
This is related to an old debate on the economy between the so-called classical and Keynesian economists. For the
first the economy, operating under the free forces of the market, that is, without State intervention, reaches
equilibrium, by the automatic settings that are observed in the different markets. To Keynesians, given that there are
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rigidities in the markets, particularly in labor, there is no way to achieve a long-term balance and therefore the State
should intervene by means of fiscal policy to mitigate recessions and expand the moments of prosperity.
That is, there are two visions of the economic relationship between government expenditure and total production; on
the one hand the Keynesians, for whom the direction of causality goes public expenditure to the product and the
Wagnerians, for whom the causality runs in the opposite direction. The debate has to be clarified, since what is being
discussed is whether the government should intervene in the economy to control short-term fluctuations and even
being more demanding, interested in the impact of public expenditure on economic growth and therefore on the
behavior of the long-term economy.
Studying above is of vital importance in the pursuit of growth as reported about the role that the government can
have in stimulating the economy via increases or reductions in spending. If persistent is that product depends on
government spending, or that it is caused by the latter, then an expansionary fiscal policy aimed at generating
dynamism must be set especially in the short term; it would be desirable to intervene to correct the cycle. Conversely,
if the direction of causality runs from the product increases to government expenditure, then the conclusion is
completely different, since determinants of growth other than those laid down should be investigated here and the
interest of policies should focus on them.
In short, it is interesting to highlight the sense of the relationship between production and public spending. To
discover whether what has been presented is a statistical causality of government spending on production or the
reverse, the first case is the KH, while the second is the WH. To analyze the above, two research questions were
raised: is there cointegration between series of production and public spending? If the answer is yes, then what is the
direction of statistical causality between series production and public spending? In addition, two additional
hypotheses were raised: 1) no relationship exists between the series of production and public spending (neutrality
hypothesis) and 2) there is a two-way causation between the series of government spending and production
(feedback effect that emerges from some historical studies, particularly Cárdenas, 2015).
The discussion is relevant to Mexico, as a series of economic reforms have been implemented, especially fiscal,
seeking increase the revenue via taxes and by the expenditure side a rule of structural balance has been created, all
this with the intention of increasing the degree of intervention in the economy to correct the current stage of
economic stagnation. The results presented are intended to serve to assess the performance of economic policy
makers aimed at encouraging economic growth, a key part of welfare in Mexico.
Depending on what has been established, in the first part is a brief presentation of the studies that have been
addressed in the discussion, both at the national and international levels. The second part makes reference to the
econometric method, which involves time series and analysis of three stages: evidence of unit roots, cointegration,
and the Granger causality test. The third presents the data used, the source and its characteristics. The fourth presents
the results of the econometric analysis. After reviewing the theoretical arguments made by other authors and
exposing the findings for the Mexican economy, the study concludes with the final part and makes some
recommendations for those who have the responsibility to take decisions.
2. Literature Review
Since its inception the WH (Wagner, 1889 and 1904) has generated a huge amount of literature on the subject; some
classical studies are by Peacock and Wiseman (1961), Gupta (1967), Goffman (1968), Musgrave (1969), Bird (1971),
and Michas (1975). Subsequent to these, a great amount of work has been published; in order to examine the best
way to address the issue in the Mexican case, what was done was to select those that were considered most relevant,
based on those found in national and international evidence. The search revealed that there are relatively few
publications for the Mexican case, at least in scientific journals, and hence the importance of the proposal.
The review starts with Henrekson (1993), who establishes that there are numerous studies that have tested the WH
using time series, but finds that their results are spurious since the variables are not stationary in levels and the
variables are not cointegrated. In his study, data was used from the Swedish economy for the period 18611990,
which is long enough and it allows you to avoid many mistakes on the estimate. His study variables are public
expenditure and national income.
According to Henrekson (1993:407), for Wagner there were three reasons why as an economy develops there is an
increase in public spending. First, because modernization and industrialization by definition leads to an increase of
private activities that transfer to the public sphere. To become more complex, society develops the need for
protection and regulation by the public sector; in addition, urbanization, and the division of labor that accompanies
industrialization require higher costs for the fulfillment of contracts, ensuring the order and the efficient functioning
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of the economy. Economic development becomes necessary for the increase of public activities.
Second, Wagner argued that growth in real incomes would facilitate the relative expansion of elasticity of
expenditures on cultural property income and well-being. Education and culture are areas that Wagner believed were
better provided by the public sector (Henrekson, 1993:407). Thirdly, for Wagner, changes in technology and
economic development implied that the government took the administration of natural monopolies to strengthen
economic efficiency. In fact, there are studies that by their magnitude cannot be made by the private sector, must
necessarily have the support of the State; think, for example, about the construction of roads, railways, and airports,
among others (Henrekson, 1993:407).
Henrekson (1993:408) concludes therefore that the WH refers to a growth of government in relation to the total
economy growth as per capita national income. So to estimate the relationship we can use the following equation:
GDP
Gf
GDP N



(1)
where G represents government spending, N is the population, GDP is the production (in real terms). Thus, if G/GDP
increases as GDP/N, then, this means the value of the elasticity of the relation exceeds zero. This was the method he
used in his study, for the series analyzes the presence of unit roots and sought after if the series were cointegrated.
His findings were that series were stationary at first differences and were not cointegrated, concluding that the
relationship there is not between per capita production series and the share of public expenditure in the economy. The
main criticism of his work is that it suggests that what happens in Sweden can be used as definitive evidence against
the WH and to discredit the results of other studies that have used time series.
Several years later Peacock and Scott (2000) made a summary of the evidence up to that time, finding that the
majority of studies have bad specification problems, since the WH omitted the role of public enterprises. In their
opinion, most of the work is too focused on econometrics and the sophistication of its methods, more in the context
of the law and its historical importance. Its recommendation is study all the public sector and its growth, not only the
variable of spending, as well as consider the temporal context, socio-economically occurring all the time. Their work
reflects on one of the major shortcomings of the current econometric work: economic history.
The WH can be used as a resource for analyzing the impact of changes in the pattern of a country’s development on
the participation of the government in economic activity, which is argued by Tobin (2005) in the case of the Chinese
economy and its more or less recent economic liberalization process. Using data for the period 19782001, an
autoregressive model and a partial adjustment model were applied and it was found that real GDP actually has a
positive effect on government spending. Their results led him to conclude that the increase in the role of the State in
the economy is a necessary complement to modernization. In his opinion there is no crowding-out effect of private
investment.
Akitoby et al. (2006) presented an innovative study that takes into account both the short and the long term in the
study of the relationship between public spending and production, using a model of correction of error for a sample
of 51 developing countries. They found that the product and government spending are cointegrated in at least 70% of
the countries, involving a long-term relationship in line with the WH, which contrasts with the existing literature that
provides a weak support for the WH in developing countries. This last statement is true if it is considered that for the
Chinese case Huang (2006) didn’t find evidence of the WH, the same as Narayan et al. (2008), but this was
contradicted by the work of Mohammadi et al. (2008) who found that the HW is valid for the case of Turkey using an
autoregressive distributed lags model.
Supporting evidence of the WH in the case of developing countries is also given by Avella (2009) who focused on
Colombia. In his work the evolution of expenditure is discussed, in general terms, in the light of the political context
and the demands of budgetary institutions the study is historical-statistical in nature. With information for the
period 19252003 evidence was found for the WH; as did Sarmiento (2012) with information for the period between
1905 and 2010. Other studies that found favorable evidence for the WH in developing countries are those by Bojanic
(2013) for Bolivia and Balázs & Ajándék (2013) for Hungary.
Magazzino (2010), using information from 1960 to 2008, for the Italian case applied a battery of methods, which
include ordinary minimum squares, generalized least-squares, robust ARIMAX and GARCH. As expected, there
were contradictory results. Using the simple model, in which real incomes is the independent variable and real public
spending as a proportion of total production is used as the dependent variable, he found a statistically significant
negative sign. Analyzing the reason for this result, it appears that one possible cause is the absence of additional
explanatory variables in the model estimated. His article highlights the role played by political pressures in the
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increase of the budget and the history.
In order to continue with the previous work, Magazzino (2012) used data from the Italian economy for the period
19602008, now studying the impact that different types of spending (interest, final consumption, income-dependent
work, production and public investment subsidies) have on actual total product. What he found was a relationship of
cointegration for three of the five items. Analysis in the sense of Granger causality, only found evidence for the WH
for spending and passive interests in the long term and for the variable of spending dependent on income in the short
term. At the end he makes some suggestions to improve estimates, of which the most important is that it should
distinguish between good and bad economic times, as well as analyze the movements of short and long term income
and fiscal balances. Finally, the international review highlights the work of Magazzino et al. (2015) who for a sample
of countries with data from 1980 to 2013 and the European Union found that there is a two-way causality between
government spending and national income in three countries; the WH is held for eight countries and the KH is
maintained for four countries, while the absence of a relationship is presented with twelve countries.
For the Mexican case eleven previous studies were found, seven of which are summarized in Iñiguez-Montiel’s
(2010) work and three more have been added, which are summarized in Table 1.
Table 1. Overview of previous studies for the Mexican case
Authors
Period
Methodology
Conclusion
Mann
(1980)
19251976
19411976
Coefficients of elasticity of the OLS
regression equations
WH negative
Nagarajan and Spears
(1990)
1925976
19411976
19501980
The rate of elasticity coefficients
the entry of the OLS regressions
WH positive
Murthy
(1993)
19501980
Test for unit roots, cointegration
WH positive
Ashworth
(1994)
19501980
19501988
Test for unit roots, cointegration
WH negative
Hayo
(1994)
19501980
Test for unit roots, cointegration
WH negative
Murthy
(1994)
19501980
19501988
Test for unit roots, cointegration,
Error Correction Model
WH positive
Lin (1995)
19501980
19501990
Test for unit roots, cointegration,
test of no causality
WH negative
19501980
WH positive
19501990
Galindo & Cordera
(2005)
19702004
VAR model and structural change
WH negative
Iñiguez-Montiel
(2010)
19501999
Test for unit roots, cointegration,
Error Correction Model and Granger
causality test
WH positive
KH negative
Rodríguez, et al.
(2013)
19502009
VAR model, structural change and
Granger causality test
WH positive
Rodríguez &
López-Herrera
(2014)
19802007
Data panel, unit roots and
cointegration
WH positive
Source: Expanded from the work of Iñiguez-Montiel (2010:888).
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Evidence for the Mexican case is divided into three groups; one includes the work of Mann (1980) and Nagarajan
and Spears (1990), with information for the period 19251976. The second includes the studies of Murthy (1993),
Ashworth (1994), Hayo (1994), Murthy (1994) and Lin (1995), with information for the period 19501980 and a
third that includes the studies of Galindo & Cordera (2005), Iñiguez-Montiel (2010), Rodríguez et al. (2013), as well
as Rodríguez and López-Herrera (2014) with information from four periods (19702004, 19501999, 19502009
and 19802007). The last three studies are the basis of this, since the HW is proven once more, with a sample of
1925 to 2014, would be substantial evidence for the Mexican case.
Iñiguez-Montiel’s (2010) work examines the relationship between government spending and national income in the
period from 1950 to 1999, uses time series and shows that the series are non-stationary and cointegrated. Using a
Granger causality test it is found that GDP causes government expending, which establishes the validity of the WH.
But he points out that his paper, was the first to assess the validity of the KH for Mexico; this is not necessarily true,
since there is much previous work assessing the relevance of public expenditure, particularly on investment over
growth, like Ramírez (1994), Lächler & Aschauer (1998), Mendoza (2000), and Castillo & Herrera (2005), as well as
Galindo & Cordera (2005).
The paper by Rodríguez et al. (2013) is distinguished by the application of a VAR model with data obtained from
official national sources (previous work mostly used the international database of Summer-Heston). The work is
under different specifications of the WH that is maintained and is consistent. Its main contribution is the
consideration of structural change, determined in the year 1982 and the historical distinction between a period of
economy with high State intervention from 1950 to 1981 and a free market economy from 1982 to 2009.
The latest work on the Mexican case was conducted by Rodríguez and López-Herrera (2014), who innovate using
state-level data which demonstrates compliance with the WH for the period 19802007. They give econometrical
evidence of unit roots and cointegration from the panel of data they use. They divided states into three sub-groups
(by income levels), enabling them to identify that WH is fulfilled according to the level of development reached,
particularly in the group of states listed as of average income.
The way in which the WH must be estimated could be determined from the review, something to be presented in the
next section, also we can see that there is conflicting evidence on the validity of the WH realization, which is
common in current economic studies to vary the temporality of the data, its source and the econometric technique
used; despite this, it is considered that with this study we can increase knowledge on this subject in Mexico and give
more validity to the studies presented.
The main contribution of this paper lies in the increase of the sample for the realization of long-term studies of the
Mexican economy, overcoming all that has been done so far. Another is the review of the literature of the Mexican
case and that we put at the disposal of readers so that they can replicate this work in the future. Also, unlike other
papers, we use a unified series of production and public spending that were scattered in official sources and are
available to readers who request them. Finally, the work applies an econometric technique already used by other
authors to try to replicate their results with a larger sample and avoid creating confusion in relation to the validity (or
not) of the HW (and thus of complementary as the Keynes, neutrality and feedback hypothesis).
3. Methodology
Following the work of Henrekson (1993) we estimated five different versions of the WH, the first already presented
in the previous section, the other four are as follows, starting with the version used by Peacock and Wiseman (1961)
and Musgrave (1969) (it should be noted that the KH and other hypothesis given in the introduction are evaluated to
carry out the causality test):
()G f GDP
(2)
Version of Gupta (1967) and Michas (1975):
G GDP
f
NN



(3)
Version of Mann (1980):
(4)
(GDP)
Gf
GDP
(5)
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Economic theory (Keynes versus Wagner hypothesis)
Conclusions and economic policy
Series:
G, GDP, GDP/N, G/GDP and G/N
Real values, 1970
1925-2015
Log
With official information
Unit Root Tests
Cointegration Engle-Granger procedure
Granger causality tests
1. Estimation of one simple OLS
model.
2. Get the residual (ADF test)
3. Error Correction Model
WH (Yes or no)
KH
Feedback hypothesis
Non relation
Figure 1. Processes carried out in the research (methodology)
Source: Own elaboration
The examination of these economic relations was carried out with annual time series for a period of 90 years
(19252014), using logarithms and actual values based on 1970. The analysis followed a three-stage process. First of
all, the presence of unit roots was analyzed to verify whether or not the series in levels was stationary. If the variables
are stationary, then the classical econometric methods are sufficient, otherwise the variables have unit root that is
either not stationary or integrated first-order condition that must be fulfilled to carry out the next stage which consists
of the analysis of cointegration. In the study to assess the presence of unit roots we carried out the Augmented
Dickey-Fuller (ADF) test for models without trend and constant, with constant and constant and trend in levels and
first differences.
The second step was to verify if there is cointegration of the series through the procedure of Engle and Granger in
two stages, in order to confirm that there is a long-term relationship between the variables of interest and to examine
their short-term dynamics. The economic interpretation of such a relationship is that although two variables may tend
to have wandering values in time without returning to the medium constant, economic forces do not permit these
series to move erratically on a permanent basis (Iñiguez-Montiel, 2010: 889). The procedure initially estimated a
model through Ordinary Least Squares (OLS), from which, if the estimated residual series is stationary, it is said
there is cointegration and that between the variables exists a long-term relationship.
The second stage of the procedure of Engle-Granger consists of an estimation of an Error Correction Model (ECM)
to analyze the short-term relationship between the variables. An ECM combines long term with an adjustment
mechanism of short term (error correction), which allows you to see how the variables vary from one period to
another in search of their convergence to the balance of long term.
According to Engle and Granger, if two variables are I (1) and they are cointegrated, then there should be
bi-directional or unidirectional causality in the variables I (0), therefore the third stage consisted in analyzing the
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direction of causality, using the procedure proposed by Granger to decide whether it is government expenditure that
causes statistically production (KH) or production causes statistically to the public expenditure (WH) (for a detailed
explanation of the methodology see Asteriou and Hall, 2006).
4. Data and Description
The series of national production, population and total public expenditure were used for testing the hypotheses. The
information corresponds to the Mexican economy for the period 19252014 values real basis of 1970. Logarithms to
the series were obtained to have a better representation of their behavior. For so long it was complicated getting
series since the bases that are expressed are different and have changed forms of calculation, so we proceeded to
perform a series of approximations. The national production information was obtained from 1925 to 1970 of the
Sistema para la Consulta de las Estadísticas Históricas de México 2014 of the Instituto Nacional de Estadística y
Geografía (INEGI) at 1970 prices. To obtain information from 1970 to 1993 we turned to the same source, but 1980
prices, so we calculate the growth rates for those years and with them the missing values with 1970 prices. Data for
19932014 were obtained from the Banco de Información Económica (BIE) from INEGI and the procedure
explained above is followed.
The population was used to calculate the values per capita in the series of interest (production and public spending).
Information from 1925 to 1970 was obtained from the Sistema para la Consulta de las Estadísticas Históricas de
México 2014 from INEGI, and to project values from 1970 to 1990 we used the data of the censuses of population
for those years. Information for 1990 to 2014 was obtained from the projections made by the Consejo Nacional de
Población (Conapo).
Public expenditure for the period 19251979 was obtained from the Sistema para la Consulta de las Estadísticas
Históricas de México 2014 from the total of expenses; given that the data of 1972 was absent we used the same
source but used the value corresponding to the total expenditure of the federal government according to
administrative classes. For the period 19802012 we used another basis of expenditure contained in the Sistema para
la Consulta de las Estadísticas Históricas de México 2014, for which growth rates were calculated, and with these the
first series was completed. Data for 2013 and 2014 was obtained from BIE and followed the procedure described
above.
Figure 2. Evolution of G/N and GDP/N in Mexico, 19252014
Source: Own elaboration.
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The Mexican economy has experienced, during the study period, by at least three models of development: 1)
formation of the national State from 1925 to 1939, 2) model of economic growth via industrialization with strong
State intervention, 19401981 and 3) model of openness and macroeconomic stabilization, 19822015. In the
economic history of Mexico, there are, according to the literature, at least two points of structural change in the
sample, one in 1940 and one in 1982 (see Moreno-Brid and Ros, 2009; Cárdenas, 2015). The first is due to the start
of the consolidation of the national State, the second to the debt crisis that forced a change of the economic model,
one less interventionist and liberal vocation that focused on macroeconomic stability, particularly the control of
inflation to the detriment of economic growth.
From Figure 2 it can be inferred that in terms of economic growth, the period 19401981 is superior to the period
19822014, in fact it confirms with the data of Table 2 (on average for the first period the economy grew 6.4% and in
the second 2.12%, a similar situation is observed in the case of public expenditure). With the preliminary information
presented there appears to be evidence the variables are closely related and have a tendency for growth (product of
public expenditure elasticity was 1.90 from 19401981, 1.47 from 19812014 and 1.71 for the whole sample). From
the data inspection, we can say that series are not stationary in average and there is possible cointegration.
Table 2. Basic statistics of series, Mexico, 19252014
Period
Formation of the national
State
Industrialization with State
intervention
Model of openness and
macroeconomic stabilization
Total period
19251939
19401981
19822014
19252014
GDP
G
G/GDP
GDP
G
G/GDP
GDP
G
G/GDP
GDP
G
G/GDP
N
15
15
42
42
33
33
90
90
Mean (%)
1.73
0.61
6.40
12.19
2.12
3.12
4.08
7.01
Median
3.31
-1.07
6.53
6.11
2.80
3.23
4.44
4.82
Standard des.
6.99
12.26
2.52
24.43
3.11
16.72
4.31
20.66
Product of public
expenditure
elasticity (%)
0.35
1.90
1.47
1.71
Source: Own elaboration.
5. Econometric Results
Table 3 presents the results of the Augmented Dickey-Fuller (ADF) test for unit roots for series production, public
expenditure, public expenditure per capita, public spending as a proportion of GDP and GDP per capita. The
conclusion is that series are not stationary in levels; they are integrated in the order of 1, so in their first differences
are stationary. In this way it is possible to conduct a cointegration test with the five specifications presented before.
Table 3. Unit root test Augmented Dickey-Fuller (ADF), Mexico, 19252014
Variable
ADF
WCT
C
TC
Statistic
Lag
Statistic
Lag
Statistic
Lag
GDP
5.139
1
-0.683
0
-0.433
0
D(GDP)
-1.149
5
-8.080
0
-8.062
0
G
2.721
0
-0.508
0
-1.336
0
D(G)
-8.632
0
-9.436
0
-9.393
0
GDP/N
3.608
0
-0.515
0
-1.133
0
D(GDP/N)
-7.752
0
-8.669
0
-8.619
0
G/N
1.465
0
-0.646
0
-1.558
0
D(G/N)
-9.124
0
-9.384
0
-9.332
0
G/GDP
0.402
0
-1.137
0
-2.036
0
D(G/GDP)
-9.735
0
-9.765
0
-9.711
0
Statistics in bold indicate a rejection of the null hypothesis of unit root existence. Critical values at 1% are -1.94
without constant and tendency (WCT); -2.89 with constant (C) and -3.46 to the model with tendency and constant.
Source: Own elaboration using Eviews 7.2.
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Table 4. Analysis of cointegration with Engle-Granger technique, Mexico, 19252014
Version
Constant
GDP o
GDP/N
ADF
R2
SE
G/GDP=f(GDP/N)
-3.189
1.103
-2.910
0.793
0.135
(-13.65)
(18.36)
G=f(GDP)
-3.590
1.484
-2.563
0.966
0.147
(-21.93)
(50.43)
G/N=f(GDP/N)
-5.178
2.100
-2.923
0.933
0.135
(-22.22)
(35.05)
G=f(GDP/N)
-8.217
3.310
-3.431
0.973
0.131
(-36.44)
(57.07)
G/GDP=f(GDP)
-1.589
0.484
-2.559
0.752
0.147
(-9.70)
(16.45)
Values in parentheses are the t-ratios. ADF: Statistical test to check cointegration, following the Engle-Granger
procedure. The critical value at 1% was -2.591, using Eviews 7.2.
Source: Own elaboration.
The cointegration test revealed that series production and public spending are related in the long term, since test of
unit roots on the levels of residuals from an estimate in its static form of the five proposed specifications indicated
that they are stationary; it is worth noting that test was performed by using zero lags without constant and trend. As
you can be seen in Table 4 the signs of the relationship between the variables are expected and were statistically
significant.
As a second part of the cointegration test, the error-correction models were estimated for each specification, which
appear in Table 5. It shows that the error correction mechanism presents the expected negative sign, which means
that there are conditions to reduce the imbalance in the next period (year). On average, according to the results of all
estimates, the deviations of the public expenditure with regard to its equilibrium level are corrected annually by
approximately 17%.
Table 5. Error Correction Model, Mexico, 19252014
Specification
C
GDP o
GDP/N
EC
dG/GDP
0.009
-0.592
-0.188
(1.253)
(-1.428)
(-3.425)
dG
0.013
0.549
-0.141
(1.332)
(1.392)
(-2.733)
dG/N
0.009
0.399
-0.188
(1.252)
(0.963)
(-3.430)
dG
0.019
0.461
-0.243
(2.522)
(1.146)
(-4.404)
dG/GDP
0.012
-0.422
-0.141
(1.283)
(1.070)
(-2.725)
C: Constant, EC: Error Correction Mechanism
Values in parentheses are the t-ratios. Significant corrective mechanisms to the 1%
Source: Own elaboration using Eviews 7.2.
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At this point, we know that series are non-stationary in levels and are cointegrated, as far as we know there is a
relationship between them what we don’t know is the direction of causality of the same. We have, in accordance
with economic theory, two hypotheses that might respond to the type of relationship, the WH and the KH. To verify
which applies in the case of the Mexican economy we conducted a Granger statistical causality test, with the results
of Table 6. Using ten lags (and even with 25 lags that are not reported) the result is that the WH is discarded while
the KH is held. This result was not expected, but coincides with the findings of other researchers. Thus, fiscal policy,
particularly public expenditure, has been partly responsible for the observed trajectory of economic growth in
Mexico.
Table 6. Granger causality test, Mexico, 19252014
Direction of causality
F -statistical
Probability
Inference
GDP/N does not cause G/GDP
1.176
0.325
WH
negative
G/GDP does not cause GDP/N
2.017
0.047
KH positive
GDP does not cause G
1.405
0.200
WH
negative
G does not cause GDP
2.238
0.027
KH positive
GDP/N does not cause G/N
1.410
0.198
WH
negative
G/N does not cause GDP/N
1.918
0.060
KH positive
GDP/N does not cause G
1.607
0.126
WH
negative
G does not cause GDP/N
1.905
0.062
KH positive
GDP does not cause G/GDP
1.051
0.413
WH
negative
G/GDP does not cause GDP
2.241
0.027
KH positive
These tests were performed with 10 lags.
Source: Own elaboration using Eviews 7.2.
6. Conclusions
When we started the project of investigation we believed that government expenditure preceded changes in total
production, and that the WH was verified for the Mexican case and in consequence should change the focus of the
federal policy of promoting economic growth. The results are that the WH is not maintained, which agrees with the
work of Mann (1980), Ashworth (1994), Hayo (1994), Lin (1995) and Galindo & Cordera (2005). The result is that
Keynes was right, correct fair path production and growth of an economy necessarily passes by increases in public
spending, particularly those related to public investment, as different studies show (recently Srithongrung & Sánchez,
2015).
The hypothesis of neutrality, and feedback indicated at the beginning are not verified, only the KH, from which it is
concluded that the Mexican federal government must increase its expenditure in critical times and cutting it in
moments of bonanza, following a countercyclical policy. In the same way, it is recommended to increase the amount
of the expenditure, without increasing taxes, taxing is only the best way for those who have more income, since of
the possible sources of financing of expenditure, this is the least distorting in the long term. Not least, the authorities
should make good use of the resources; you have to allocate the available capital where greater dividends are
generated for a vast majority of the population; otherwise, spending could crowd-out and not supplement private
investment so cancel the possibilities of growth. The Mexican federal government has already advanced in this
direction by establishing the budget base zero.
From historical revision it is known for 1925 and until 1939 the Mexican economy did not have a strong government,
was under construction and it is likely that the WH is met for that period, since the economy was growing on the
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basis of foreign investment and from here you could expand the government through its spending. From 1940 the
government started its consolidation and began a period of clear intervention in the economy, through the creation of
formal institutions and companies that collaborate with the national development, a situation that lasted until the
beginning of the 1980s, which verifies the KH, as has been reported here. From 1982 the Mexican economy changes
its course with a consolidated federal government and even bulky, according to those who took decisions back then,
so they decided to modify the economic model, to give greater depth to the market forces and less to the State, which
corresponds to a low economic growth, an annual average of 2.1% through 2014 as reported in Table 2. The slow
economic growth in the present day is correlated with low relative growth of public expenditure (3.1% against 12.1%
from the period 19401981). In this way, the KH is validated.
At the end of this report, there are some elements that are outstanding: 1) we must evaluate the WH and KH
considering the identified sub-periods; 2) it is appropriate to incorporate the estimates, public spending on
investment; 3) it is necessary to apply a different technique for the verification of cointegration, as it can be Fully
Modified OLS, Canonical Cointegrating Regression or Dynamic OLS and 4) the historic approach is crucial to
provide more substantive elements to the discussion. This is intended to take advantage of the long series of
information that has been built. For now, with the results presented, it can be said that the effective and efficient
intervention of the government in the economy is necessary, always complemented by the market and, in particular,
the enterprise-class, who at the end of the story generated wealth in an economy through their daily efforts of
production of goods and services for the satisfaction of needs.
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The application of severe economic adjustment measures in many countries of the Latin American region, notably Mexico, has led to across-the-board cuts in public spending that have generated unprecedented reductions in the level of public investment in the nation's railways, highways and roads, bridges, sewerage systems, modern power plants, dams, airport fields, and port facilities. These investments usually complement, rather than crowd out private investment, and their continued and future neglect may well undermine the efficiency gains promised by the country's ongoing liberalization and privatization process. In light of these developments, this paper examines the question of whether public investment complements or displaces private capital formation in Mexico. The choice of Mexico to test the hypothesis of complementarity or substitutability between public and private investment spending is warranted for two reasons. First, it is one of the more industrialized, and from the standpoint of the US, strategically important countries of the region that has implemented market-oriented policies; and secondly, it is one of the few countries of the region for which there are reliable time-series data on public and private investment for a number of years. The paper is organized as follows: first, it gives a brief overview of the role of the Mexican state in the investment process during the post WWII period. Next, it develops a conceptual framework of analysis for including the public capital stock as an argument in a standard neoclassical production function. The third section presents a modified flexible accelerator model. Statistical estimates of various specifications of the modified accelerator model are then presented in the fourth section. Lastly, pairwise Granger causality tests are performed to determine the direction of correlation between public and private investment expenditures. The last section summarizes the paper's major findings. -from Author
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Este documento presenta evidencia empírica sobre la relación entre el gasto público y el crecimiento económico en Colombia, para el periodo (1905-2010), bajo la metodología conocida como series de tiempo. Allí, se abordan dos grandes enfoques: el de endogeneidad y el de exogeneidad. El primero, afirma que el gasto es endógeno, elástico y procíclico frente al producto, mientras que el segundo lo considera exógeno y contracíclico. La primera perspectiva es conocida en la literatura económica como Ley de Wagner y, la segunda, obedece a un comportamiento keynesiano. No obstante, es importante subrayar que bajo estos dos escenarios se hace posible la existencia de un enfoque mixto, cuyas características obedecen a un comportamiento endógeno y contracíclico del gasto público frente al producto interno bruto (PIB). Los resultados sugieren que las series no son estacionarias, esto es, que son integradas de orden uno. Por su parte, el test de Cointegración de Johansen indica la existencia de una relación de largo plazo entre el PIB y el gasto público. Además, se encuentra un fuerte respaldo a la Ley de Wagner, debido a que la dirección de causalidad va del PIB al gasto público y los coeficientes de elasticidad son positivos y significativos.