Testing threshold cointegration in Wagner's Law: the role of military spending

This paper uses historical data since mid-19th century to test
the validity of Wagner's Law for the Italian economy. Unlike the previous
studies, we accommodate possible nonlinear asymmetric e ects of total goverment spending and GDP toward their long-run equilibrium. Our results
show the presence of a threshold cointegrating relationship between the two
variables with signi cantly di erent error correction adjustments in normal
and extreme regimes. Particularly, we nd the validity of Wagner's Law from
1862 to 2009, only when we take into account strong nonlinear responses of
government spending during the WWI and WWII period. Robustness checks
clearly recognize nonlinear behaviour of government expenditure driven by
military spending.