Abstract:

According to Keynesian approach, an increase in public spending increases economic growth more than the spending, while according to the Wagner law, an increase in economic growth increases public spending more. On the other hand, the increase in public spending is seen as the cause of inflation especially in the short term. The relationship between public spending and inflation is addressed by the Patinkin effect. The aim of this study is to test the impact of public spending on economic growth and inflation for the period 1995-2018 in 28 OECD countries by panel data analysis. In this direction, first of all, the stagnation of the series was tested and the horizontal cutting dependency was ignored and the first-generation panel unit root tests were applied to the series. It has not been passed the matching test that gives a long-term relationship because it has stopped at all levels of series. These series have been applied Granger causality and VAR analysis. According to Granger's causal analysis, a one-way relationship between economic growth and public spending has been found and Wagner's hypothesis has been found to be valid. As a bilateral cause was also identified between public spending and inflation, the Patinkin effect was determined to be valid. According to the VAR analysis, there is a negative relationship between public expenditure and economic growth, and between positive public expenditure and inflation.

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