Wagner-Keynesian Nexus in a DSGE Model

Abstract

This research integrates two longstanding controversies, Wagner`s law and Keynesian hypothesis, into a dynamic stochastic general equilibrium (DSGE) model. The former perceives that government spending endogenously varies with output growth, while the latter considers that government spending exogenously triggers economic growth. We show that these two standpoints will gradually coincide as private consumption and public expenditure become more substitutable.