Economic Growth and Fiscal Expenditures in Hungary

Stylized Facts Based on VAR Modelling

Abstract

The effects of fiscal policy on economic growth, and more generally the relationship between government expenditures and output is a central question in macroeconomics. In this paper we use a two-equation VAR model to estimate a mixed (Keynesian and Lucasian) theoretical model on Hungarian data between 1960 and 2011. We found that results differ in several aspects of both short and
long term implications, as well as in terms of criteria for stability. Generally over this period our result does not prove the presence of Keynesian mechanisms, but Wagner’s law proves strongly to be true. Our result show that stability is possible, but it requires sticking to a defined expenditure/GDP ratio, otherwise consolidations will unavoidably hurt growth. Based on our conclusions and a
detailed analysis of our time series with regard to various economics features we also offer possible econometric alterations of methodology that might provide better estimations and more reliable answers to the proposed economic questions.