This paper tests Barro's (1979) tax smoothing model of fiscal policy. The model implies that budget deficits and surpluses are used optimally to minimise the distortionary effects of taxation, given a certain path of spending. The theory has a number of implications both for the statistical time series properties of government budget data and for causality amongst these variables. These implications are derived and tested on a vector autoregression model using annual data for Italy covering the period for the full sample. However, when we consider the post World War II period all of the tests clearly reject the tax smoothing hypothesis.
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Paper provided by University of Exeter, School of Business and Economics in its series Discussion Papers with number
98/13.
Length: Date of creation: 1998 Date of revision: Handle: RePEc:fth:exetec:98/13
Contact details of provider: Postal: School of Business and Economics University of Exeter Streatham Court Rennes Drive Exeter EX4 4PU Phone: (01392) 263218 Fax: (01392) 263242 Web page: http://www.exeter.ac.uk/sobe/ More information through EDIRC
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation