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Non-linear adjustments in fiscal policy

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Author Info
Gabriella Legrenzi (University of Cambridge)
Costas Milas (Department of Economics, City University, London)

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

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Length: 26 pages
Date of creation: 19 May 2004
Date of revision:
Handle: RePEc:cty:dpaper:0406

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Related research
Keywords: general government expenditure; general government revenues; cointegration; persistence profile; asymmetries;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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