The causal relationship between government revenue and expenditure: evidence from Albania - Economicus

by, Tatjana MOCKA

Abstract

A sound fiscal policy is important to promote price stability and sustain growth in output and employment. Fiscal policy is regarded as an instrument that can be used to lessen short-run fluctuations in output and employment in many debates of macroeconomic policy. It can also be used to bring the economy to its potential level. If policymakers understand the relationship between government expenditure and government revenue, without a pause government deficit can be prevented. Hence the relationship between government expenditure and government revenue has attracted significant interest. The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. Besides the theoretical arguments about this relation, vast empirical literature is also available all over the world. The main purpose of the study is to examine the causal relationship between government revenues and expenditures of the Albania government over the period from 1986 to 2017 using Granger causality and VECM tests methodology, which provides channels of causation between government revenues (GR) and government expenditures (GE). The empirical results show a bidirectional causality running between revenues and expenditure. This result supports lend support to the fiscal synchronization hypothesis, implying that government of Albania makes its revenues and expenditures decisions simultaneously. Thus, the policy maker should pay attention to the bidirectional causality between government expenditures and revenues which might complicate the government’s efforts to control the budget deficit and may contribute in explaining the high national debt figure.