Measurement and Analysis of the Impact of Gross Domestic Product (GDP) Levels on Government Expenditure and Inflation: Testing Wagner’s Law in the Case of the Libyan Economy)

Abstract

      This study aims to measure and analyze the impact of Gross Domestic Product (GDP) levels on government expenditure and inflation in Libya during the period 1995–2022, within the framework of testing the applicability of Wagner’s Law to the Libyan economy. The research problem lies in examining the extent to which GDP levels influence government spending and inflation, and whether Wagner’s hypothesis—suggesting a long-term positive relationship between GDP and public expenditure—holds true in this context. The methodology employed includes simple regression analysis, the Augmented Dickey–Fuller unit root test to ensure data stability, and additional econometric techniques such as causality tests, cointegration bounds, autoregressive models, and impulse response analysis, using EViews software. Findings indicate a significant long-term relationship between GDP levels and government expenditure, confirming the validity of Wagner’s Law in Libya. However, the relationship between GDP and inflation was positive but statistically insignificant. The study recommends rationalizing government spending, strengthening monetary policy instruments, and revising fiscal and customs policies to enhance investment in productive sectors and reduce reliance on oil exports.