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Non-linear adjustments in fiscal policy

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  • Legrenzi, G.
  • Milas, C.

Abstract

This paper provides evidence that the Italian public finances are sustainable, as the country meets its intertemporal budget constraint. Nevertheless, the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, which can have some detrimental economic effects, rather than changes in government spending or policy mixes. Our non-linear analysis, in particular, shows that taxes adjust more rapidly when deviations from the equilibrium level get larger, and that they are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. In order to correct the undesirable trend of high fiscal pressure and high public debt in Italy, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.

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File URL: http://openaccess.city.ac.uk/1431/1/0406_legrenzi%2Dmilas.pdf
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Bibliographic Info

Paper provided by Department of Economics, City University London in its series Working Papers with number 04/06.

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Date of creation: 2004
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Handle: RePEc:cty:dpaper:04/06

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Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
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Keywords: general government expenditure; general government revenues; cointegration; persistence profile; asymmetries;

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