Causality between government spending and income: the case of Saudi Arabia

The paper investigates the Granger-causal relationship between government spending (G) and income (Y) for Saudi Arabia for which G is the main driver of economic growth. Previous studies investigated two-way causality, from G to Y (Keynesian) and from Y to G (Wagnerian). This paper investigates a new explanation (post-Keynesian) that links Y to G through banks’ loan-making and deposit-creation. The latter is accompanied by an increase in statutory reserves (R). The findings are consistent with the post-Keynesian theory (from Y to R, and to G).