Real Government Expenditure and Economic Growth in the Southern Caucasus Countries: A Panel Data Analysis

Abstract

The primary purpose of this paper is to find out the relationship between real government expenditures and real gross domestic product (GDP) for three countries of the South Caucasus namely, Azerbaijan, Armenia, and Georgia. The relationship between the variables is essential for policy formation for these countries due to their transition to market economy. There are two main hypotheses related to real government expenditures and growth. The Wagner’s hypothesis argues that growth of an economy leads more government spending while the Keynes’s hypothesis proposes that government expenditures feed higher economic growth. From policy perspectives, Keynesian view gives a dominant role in government intervention for higher growth while Wagner view gives just a passive role to the government in economic policy. This paper is designed to investigate these hypotheses by using econometric panel techniques. The analysis covers the years 1990-2016. According to our empirical results, there is a mutually positive relationship between real government expenditures and economic growth in the South Caucasus. At the same time, we also find short and long-term bidirectional causality. These results confirm each other and in line with the existing literature. Our study contributes to literature as filling the gap by studying the South Caucasus countries.