The Displacement Effect in the Growth of Governments

We analyze the displacement effect within a multivariaterevenue-expenditure model of government growth, based on along historical dataset, for Italy. Our long-run analysisshows a permanent influence of domestic product on the growthof governments, supporting Wagner's law. The short-rundynamics are more complex and provide some evidence for thedisplacement effect, in terms of a lower resistance againsttax-financing of government spending in the post-war. Inaddition, government spending adjusts faster when deviationsfrom its equilibrium get larger.