This paper examines the plausibility of Wagner’s ‘law’ for Greece for the period 1948 – 2010. The paper uses modern time-series econometric techniques boarding on co integrations analysis to test for the validity of Wagner’s law, which states that the growth of public expenditure can be explained as a result of the increase in economic activity. The results of the causality test indicate that there is no evidence to support either Wagner’s Law or Keynes’s hypothesis for Greek economy. Furthermore, evidences from Johansen Maximum Likelihood co-integration test and LSEM both reveal that Wagner’s law is not supported for Greece. These results suggest that despite the often vocal opposition from the country’s powerful labor unions and the general public, Greek Government should continue with the policy of cutting government spending, downsizing of the public sector, and reforming the labor and pension systems to promote greater private sector involvement in economic activities.
Keywords: OLS, Wagner’s Law; Co-integration; Causality; Government size; Growth
