The Effect of Federal Government Size on Economic Growth in Nigeria, 1961-2011

Abstract

This study investigates whether there is statistical evidence for a causal relationship between federal government expenditures and growth in real per-capita GDP in the Nigeria, using long and up to date available time series data (1961-2011). After studying the time-series properties of these variables for stationarity and cointegration, we adopted Toda and Yamamoto’s (1995) Granger non-causality tests and investigate Granger causality in detail in the context of a Vector Autoregressive Model. The Empirical results from cointegration test indicate that there exists no long-run relationship between government expenditure and economic growth in Nigeria. The Toda and Yamamoto’s causality test results show that Wagner’s Law does not hold over the period being tested. However, using VAR Granger causality test we found a weak empirical support in the proposition by Keynes that public expenditure is an exogenous factor and a policy instrument for increasing national income in the short run.

Keywords: Federal government size, Wagner’s Law, Cointegration, Granger causality, Vector Autoregression