Macro-fiscal volatility and the composition of public spending
AbstractEarlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991—2007. Our results suggest that contemporaneous increases in the volatility of regularly collected revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc –type of taxes such as capital taxes tend to favour public consumption spending. A possible explanation to these differences concerns news about the underlying economic conditions embedded in short-term volatility changes: the policy maker may be more inclined to increase public investment in response to persistent changes in the economic conditions, while temporary changes may prompt a reaction on consumption spending.
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Bibliographic InfoPaper provided by European Investment Bank, Economics Department in its series Economic and Financial Reports with number 2010/3.
Length: 29 pages
Date of creation: 28 Feb 2010
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tax volatility; public investment; public consumption;
Other versions of this item:
- Sara Maria Riscado & Juraj Stančík & Timo Välilä, 2011. "Macro‐Fiscal Volatility and the Composition of Public Spending," Fiscal Studies, Institute for Fiscal Studies, vol. 32(4), pages 511-538, December.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-EEC-2010-04-17 (European Economics)
- NEP-PBE-2010-04-17 (Public Economics)
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