Cointegration and Causality Analysis

The study investigates government expenditure and economic growth in Nigeria, using cointegation and causality analysis. The study employs Augmented Dickey-Fuller (ADF) unit root test, Kwiatkowski, Philips, Schmidt and Shin (KPSS) Test, Johansen based Cointegration and Granger Causality Test. The ADF and KPSS tests indicate that the series are all integrated of order one [I(1)]. The Johansen Cointegration tests indicate three long–run relationships between government expenditure and economic growth. While the test for causality shows that economic growth granger-cause government expenditure. The study also indicates that there exist two unidirectional causality running from GDP to TCE and GDP to TRE which supports the Wagner’s Law. The results of Error Correction Model (ECM) have negative signs and the Error Correction term (EC) indicate that there exists long run relationship between economic growth and Government expenditure. The study recommends that government should ensure that capital and recurrent expenditures are properly managed to accelerate economic growth.