Testing the Existence of Wagner Law and Government Expenditure Volatility in Indonesia Post-Reformation Era

Abstract

Aim of this study is to identify the existence of Wagner’s Law in Indonesia economy during post-reformation era. This study takes period sample of five regimes during 1999 – 2011, which are following: a) Development Reformation Regime; b) National Unity Regime; c) Mutual Cooperation Regime; d) Indonesia Unite I Regime; e) Indonesia Unite II Regime. In order to test the existence of Wagner’s Law, we also elaborate exogenous variable (tax revenue and population) as variable control. We find the result that Wagner Law did occur in post-reformation era by performing an ARDL co-integration model, yet volatility of government expenditure has to be captured. Hence, we run a GARCH model to estimate the volatility of government expenditure by elaborating the regime variable. The ARDL approach, causality test and co-integration test also support the existing of Wagner Law in this study

Keywords: Co-integration, GARCH, Wagner Law, post-reformation regimes