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Local spending and the housing boom

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Author Info

  • Albert Solé-Ollé

    ()
    (Universitat de Barcelona & IEB)

  • Elisabet Viladecans-Marsal

    ()
    (Universitat de Barcelona & IEB)

Abstract

We study the inter-temporal spending behavior of Spanish local governments during the last housing boom (1997-2006), a period of substantial short-run momentum in housing-construction revenues. We argue that the unprecedented growth in these revenues might be one of the reasons underlying the increase in the sensitivity of local government spending to (predictable) revenue changes. To detect evidence of this, we study whether local spending decisions are consistent with forward-looking behavior, working within the framework provided by Holtz-Eakin et al. (1994). Our principal findings are: (i) Local spending shows substantial sensitivity to predictable changes in revenues, suggesting that Spanish local governments did not behave as fully forward-looking agents. (ii) The departure from this benchmark was much higher in those years and/or in those housing markets in which the housing boom was most intense. (iii) The sensitivity was not as great to changes in housing construction revenues as it was to changes in ordinary revenues, but this distinction became blurred as the boom intensified.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/27.

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Length: 39 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ieb:wpaper:2011/11/doc2011-27

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Related research

Keywords: local government; inter-temporal spending behavior; housing cycle;

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References

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  1. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2010. "Lobbying, political competition, and local land supply: recent evidence from Spain," Working Papers 2010/45, Institut d'Economia de Barcelona (IEB).
  2. Holtz-Eakin, Douglas & Rosen, Harvey S, 1991. "Municipal Labor Demand in the Presence of Uncertainty: An Econometric Approach," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 276-93, July.
  3. Byron Lutz & Raven Molloy & Hui Shan, 2010. "The housing crisis and state and local government tax revenue: five channels," Finance and Economics Discussion Series 2010-49, Board of Governors of the Federal Reserve System (U.S.).
  4. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, 09.
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  6. Ben Dachis & Gilles Duranton & Matthew A. Turner, 2011. "The effects of land transfer taxes on real estate markets: Evidence from a natural experiment in Toronto," Working Papers tecipa-423, University of Toronto, Department of Economics.
  7. Douglas Holtz-Eakin & Whitney K. Newey & Harvey S. Rosen, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," NBER Working Papers 2180, National Bureau of Economic Research, Inc.
  8. María José Luengo-Prado & Bent E. Sørensen, 2008. "What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 65-80, February.
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  12. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  13. Albert Solé-Ollé & Pilar Sorribas-Navarro, 2009. "The dinamic adjustment of local government budgets: does Spain behave differently?," Working Papers 2009/7, Institut d'Economia de Barcelona (IEB).
  14. Craig, Steven G. & Hoang, Edward C., 2011. "State government response to income fluctuations: Consumption, insurance, and capital expenditures," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 343-351, July.
  15. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
  16. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  17. Andreas Fuster & David Laibson & Brock Mendel, 2010. "Natural Expectations and Macroeconomic Fluctuations," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 67-84, Fall.
  18. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
  19. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2010. "Can Cheap Credit Explain the Housing Boom?," NBER Working Papers 16230, National Bureau of Economic Research, Inc.
  20. Lars-Erik Borge & Per Tovmo, 2007. "Myopic or constrained by balanced-budget-rules? The intertemporal spending behavior of Norwegian local governments," Working Paper Series 8807, Department of Economics, Norwegian University of Science and Technology.
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  22. Skidmore, Mark & Scorsone, Eric, 2011. "Causes and consequences of fiscal stress in Michigan cities," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 360-371, July.
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Cited by:
  1. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regim," Working Paper Series 2013:19, Uppsala University, Department of Economics.
  2. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regime," Working Paper Series, Center for Fiscal Studies 2013:12, Uppsala University, Department of Economics.

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