Relationship between Government Expenditure and Economic Growth in Transition Countries: Case of Kyrgyzstan and Tajikistan

After the collapse oi Soviet Union the membercountries was accompanied by economic and political crises. Each country has chosen own monetary and fiscal policy considering the economic situation. Even though that their economic situation is similar, Kyrgyzstan and Tajikistan are pursuing opposite fiscal policy. More precisely, Kyrgyzstan in recent years has changed its fiscal policy towards expansionary policy, when Tajikistan is continuing contractionary policy. This paper analyses the long and the short-run causality relationships between government expenditure and economic growth in Kyrgyzstan and Tajikistan to reveal the results of such fiscal policies on real output, using Engle-Granger Cointegration and Granger Causality Tests.Results show that, over the 2000:1-2013:4 period, there is a long run relationship between GDP and government expenditure in both countries. According to Granger Causality lest it was found an unidirectional causality from government expenditures to economic growth in Kyrgyzstan. But Granger causality test on economy of Tajikistan does not give any causality relations between these variables.