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Fiscal Federalism and Fiscal Consolidation: Evidence from an Event Study

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Author Info
Julia Darby
V. Anton Muscatelli
Graeme Roy

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Abstract

Fiscal consolidations, episodes where governments make large discretionary improvements in their fiscal positions, have received considerable attention, especially in EMU. The existing literature demonstrates that the composition of consolidations is a crucial determinant of their success. We show that sub-central governments also play a key role in consolidations through sustained cuts in expenditures, as their intergovernmental grants are cut. In contrast to existing studies we find that cuts in capital spending at sub-central levels are a feature of successful consolidations. We also show that the government type and the nature of fiscal arrangements in a country impact on these results.

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Paper provided by Department of Economics, University of Glasgow in its series Working Papers with number 2005_21.

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Date of revision: Jun 2005
Handle: RePEc:gla:glaewp:2005_21

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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References listed on IDEAS
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    Other versions:
  3. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-1), pages 197-266. [Downloadable!]
  4. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February. [Downloadable!] (restricted)
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  5. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries - Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
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  6. von Hagen, J. & Hallett, A.H. & Strauch, R., 2001. "Budgetary Consolidation in EMU," European Economy - Economic Papers 148, Commission of the EC, Directorate-General for Economic and Financial Affairs (DG ECFIN).
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  10. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
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  11. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March. [Downloadable!] (restricted)
  12. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
  13. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD, Economics Department. [Downloadable!]
  14. Alesina, A. & Perotti, R., 1995. "Fiscal Expansions and Adjustments in OECD Countries," Discussion Papers 1995_25, Columbia University, Department of Economics.
  15. C. John McDermott & Robert F. Westcott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Working Papers 96/59, International Monetary Fund.
  16. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Julia Darby & V. Anton Muscatelli & Graeme Roy, 2004. "Fiscal Consolidation And Decentralisation: A Tale Of Two Tiers," Working Papers 2004_2, Department of Economics, University of Glasgow. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Julia Darby & Anton Muscatelli & Graeme Roy, 2006. "Asymmetries in the Responses of Sub-Central Governments to Changes in Grants: Evidence From an Event Study," ERSA conference papers ersa06p508, European Regional Science Association. [Downloadable!]
  2. Graeme Roy, 2006. "Grants Versus Tax Sharing: the Extent of Central Government Control," ERSA conference papers ersa06p74, European Regional Science Association. [Downloadable!]
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