ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, vol.54, no.3, pp.249-262, 2020 (SCI-Expanded)
Wagner's Law is a model which explains an increase in public expenditures. In this study, we test the existence of the Granger causality between public expenditures and economic growth of Southeastern European countries (Albania, Bosnia Herzegovina, Bulgaria, Croatia, Greece, North Macedonia, Montenegro, Romania, Serbia, Slovenia, and Turkey) using an advanced econometric technique which is not used in previous empirical studies by using annual panel time series data throughout for 2002-2017. The results of the study provide mix evidence about the directions and the signs of the causality in those countries. An increase in real GDP causes an increase in public expenditures in most of the Southeastern European countries. On the other side, an increase in public expenditures causes an increase in real GDP for some Southeastern countries and also causes a decrease in real GDP for others. In this paper, we have found bi-directional causality for most of those countries. Also, the results of the study indicate that the sign of the relationship between real GDP and public expenditures differs by countries. Finally, we have reached two opposite conclusions on the validity of Wagner's Law for Southeastern European countries in this study, using Konya test.