Cointegration, Causality and Wagner's Law: A test for Northern Cyprus, 1977-1996.

The purpose of this study is to analyse public expenditure growth in Northern Cyprus during the period 1977-1996. We test the validity of Wagner’s Law that there is a long-run tendency for public expenditure to grow relative to national income. This implies that public expenditure can be treated as an outcome, or an endogenous factor, not a cause of growth in national income. Conversely, Keynesian proposition treats public expenditure as an exogenous factor, which could be utilised as a policy instrument. In the former approach, the causality runs from national income to public expenditure whereas in the latter proposition, causality runs from public expenditure to national income. Utilising recent advances in co integration and causality techniques, in the case of Northern Cyprus economy, we find that there is a mixed evidence in support of Wagner’s Law.