Causality Testing for U.S. Public Expenditure, Economic Uncertainty, and Other Indicators

Abstract

Government policies respond to a variety of factors, often resulting in a growth in public expendi-ture as resources flow from the private to the public sector. A series of classic problems in public economics examines the structure of state spending. Research in the literature addresses factors such as macroeconomic conditions, periods of crisis, and political incentives. However, public opinion may contribute to changes in government expenditure proportions through mechanisms such as vot-ing and lobbying. Significant events and conditions as well as an individual’s perceptions influence public opinion, encompassing an element of economic uncertainty. This project utilizes Granger causality testing to examine causal relationships between U.S. public expenditure and factors such as periods of crisis, economic indicators, and economic uncertainty, using quarterly data from 1985-2017.