Disaggregated public spending, GDP and Money Supply: Evidence for Italy

The aim of this article is to analyze the relationship between public spending and GDP controlling for the money supply in Italy for the period 1990-2010 at a disaggregated level, using a time series approach. After a brief introduction, a survey of the economic literature on this issue is shown, before estimating this nexus for ten items of public spending according to the COFOG functional classification. Cointegration tests reveal a long-run relationship between GDP, money supply and eight spending items. Moreover, Granger causality tests results show evidence in favour of Wagner’s Law in two cases (Y->G), while a bi-directional flow has been found in only one case. The Keynesian hypothesis (G->Y) is supported by five series of spending. Some notes on the policy implications of this analysis conclude the paper.