Panel Causality Evidence on The Relation Between Government Expenditure and Income Growth in Brics Countries

The aim of this paper is to analyze the causality relationship between government expenditure and economic growth for BRICS countries. More than 20 years data have been use for the study. The results of Panel cointegration does not support the existence of long-run relationship for BRICS panel. Furthermore, the empirical finding of causality indicates no causality between government expenditure and economic growth in short-run for BRICS countries. In 1930s John Maynard Keynes argued that government spending boosted growth by injecting purchasing capacity into the economy. Since demand for loan able fund is more than supply of loan able fund, it allegedly lead to higher interest rates. Higher interest rates are believed to reduce investment while lower investment leads to lower productivity resulting in productivity means lower growth. Here government expenditure is an exogenous variable. Therefore, as far Keynesian Hypothesis is concerned there is causality between economic growth and government expenditure and causality runs from government expenditure to economic growth.