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An Examination of the Dynamic Behavior of Local Governments Using GMM Bootstrapping Methods

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Author Info

  • Dahlberg, Matz

    ()
    (Department of Economics)

  • Johansson, Eva

    ()
    (Department of Economics)

Abstract

Recent Monte Carlo evidence has shown that tests based on asymptotic critical values tend to reject a true null too often, while tests based on bootstrap critical values have empirical sizes that are very close to the nominal ones. This casts doubt on the growing number of studies indicating considerable dynamics in local government behavior since they all rely on asymptotic critical values. Using GMM bootstrapping techniques, this paper re-investigates the dynamic interrelationship between local government revenues and expenditures. Further, the results are compared with those obtained using asymptotical critical values. The panel covers 265 Swedish municipalities over the period 1979-1987. A lag of one year is found in the expenditures equation, while no dynamics is found in the own-source revenues and grants equations. These results, while contrasting sharply with those obtained when asymptotic critical values are used, are well in line with the theoretical explanations given in the literature for dynamic behavior in the local public sector.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 1997:11.

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Length: 20 pages
Date of creation: 07 Apr 1997
Date of revision:
Publication status: Published in Journal of Applied Econometrics, 2000, pages 401-416.
Handle: RePEc:hhs:uunewp:1997_011

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: GMM bootstrapping; local governments; revenues-expenditures nexus;

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  1. Dahlberg, Matz & Lindström , Tomas, 1996. "Are Local Governments Governed by Forward Looking Decision Makers?," Working Paper Series, Uppsala University, Department of Economics 1996:20, Uppsala University, Department of Economics.
  2. Davidson, R. & Mackinnon, J.G., 1996. "The Size Distorsion of Bootstrap Tests," G.R.E.Q.A.M. 96a15, Universite Aix-Marseille III.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1371-95, November.
  5. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  6. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 415-29, May.
  7. Rubinfeld, Daniel L., 1987. "The economics of the local public sector," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 11, pages 571-645 Elsevier.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  10. Bergström, Pål & Dahlberg, Matz & Johansson, Eva, 1997. "GMM Bootstrapping and Testing in Dynamic Panels," Working Paper Series, Uppsala University, Department of Economics 1997:10, Uppsala University, Department of Economics.
  11. Matz Dahlberg & Eva Johansson, 1998. "The revenues-expenditures nexus: panel data evidence from Swedish municipalities," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 30(10), pages 1379-1386.
  12. Hall, Peter & Horowitz, Joel L, 1996. "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 891-916, July.
  13. Joel L. Horowitz, 1996. "Bootstrap Methods in Econometrics: Theory and Numerical Performance," Econometrics, EconWPA 9602009, EconWPA, revised 05 Mar 1996.
  14. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
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