Investigating the Keynesian View and Wagner’s Law on the Size of Government and Economic Growth in Iran
Mosayeb Pahlavani, Davoud Abed and Farshid Pourshabi

Abstract
In this paper we examined the causal relationship between size of the government (measured as the share of total expenditure in GDP) and economic growth in Iran during the period of 1960–2008. Empirical analysis is performed by using a developed cointegration test proposed by Pesaran et al (2001) and Granger causality test based on the error correction model (ECM) and finally, we used a modified version of the Granger causality test by Toda and Yamamoto (1995), for more confident. The results of bound test indicated that economic growth is cointegrated with size of government. So, economic growth is the long-run forcing variable on size of government. Also Granger causality test based on ECM and Toda and Yamamoto approach show that a unidirectional causal flows from economic growth to size of government. On the other hands, Wagner’s law is confirmed in Iran during the period of this study.

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