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Has Sweden’s government budget policy been too discretionary? Evidence from a generalization of the tax smoothing hypothesis

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  • Adler, Johan

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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    Abstract

    Barro's (1979) tax smoothing hypothesis (TSH) assumes that the government is always subject to an optimal degree of discretion in budget policy, i.e., optimal in the sense that the welfare costs from taxation are minimized. This paper proposes a generalization of the TSH that relaxes this crucial assumption. Postwar evidence for Sweden indicates that in contrast to the TSH, the generalized model provides close to a perfect fit: Tax smoothing behavior in combination with more discretion in budget policy relative to what is optimal, can explain all shifts in the central government's budget balance, including the dramatic shifts during the period 1970-96.

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    File URL: http://hdl.handle.net/2077/2827
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 89.

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    Length: 26 pages
    Date of creation: 18 Feb 2003
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0089

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    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Keywords: Tax smoothing; Discretion; Budget policy; Budget deficits;

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    1. Paul Cashin & Nilss Olekalns & Ratna Sahay, 1998. "Tax Smoothing in a Financially Repressed Economy," IMF Working Papers 98/122, International Monetary Fund.
    2. Gregory, Allan W & Veall, Michael R, 1985. "Formulating Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, vol. 53(6), pages 1465-68, November.
    3. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
    4. International Monetary Fund, 1999. "Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia," IMF Working Papers 99/63, International Monetary Fund.
    5. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
    6. Ghosh, Atish R, 1995. "Intertemporal Tax-Smoothing and the Government Budget Surplus: Canada and the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1033-45, November.
    7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    8. Huang, Chao-Hsi & Lin, Kenneth S., 1993. "Deficits, government expenditures, and tax smoothing in the United States: 1929-1988," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 317-339, June.
    9. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    11. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    12. Olekalns, Nilss, 1997. "Australian Evidence on Tax Smoothing and the Optimal Budget Surplus," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 248-57, September.
    13. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
    14. Flavin, Marjorie, 1993. "The Excess Smoothness of Consumption: Identification and Interpretation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 651-66, July.
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