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Non-linear adjustments in fiscal policy

Author

Listed:
  • Gabriella Legrenzi

    (Keele University, Department of Economics)

  • Costas Milas

    (Keele University, Department of Economics)

Abstract

We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.

Suggested Citation

  • Gabriella Legrenzi & Costas Milas, 2005. "Non-linear adjustments in fiscal policy," Keele Economics Research Papers KERP 2005/04, Centre for Economic Research, Keele University.
    • Handle: RePEc:kee:kerpuk:2005/04
    Note: Former versions of this paper have been presented at the American Summer Meeting of the Econometric Society, the annual meeting of the European Public Choice Society and the annual meeting of the Society for Non-Linear Dynamics and Econometrics.
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0504.pdf
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    Keywords

    General government expenditure; general government revenues; budgetary disequilibria; persistence profile; asymmetries.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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