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Fiscal adjustment in Japanese municipalities

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  • Bessho, Shun-ichiro
  • Ogawa, Hikaru

Abstract

This study examines how Japanese municipalities restore their fiscal balance after a budget shock. The results show that these fiscal adjustments occur mainly via changes in government investment, accounting for 63–95% of adjustments in permanent unit innovations in grants and own-revenue. In contrast to the role of expenditure, the municipalities’ own-source revenue plays a limited role in balancing the local budget. The results also reveal that 40% of the increase in own-source revenue is offset by a reduction in grants. This suggests that the current grants system discourages municipalities from increasing their own-source revenue. Furthermore, municipalities can induce grants by expanding government current expenditure. Here, a 1yen increase in current expenditure is followed by an increase in grants of 0.65yen in subsequent years. Finally, we conduct an additional analysis based on population size to study how the adjustment process varies among municipalities of different sizes.

Suggested Citation

  • Bessho, Shun-ichiro & Ogawa, Hikaru, 2015. "Fiscal adjustment in Japanese municipalities," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1053-1068.
  • Handle: RePEc:eee:jcecon:v:43:y:2015:i:4:p:1053-1068
    DOI: 10.1016/j.jce.2014.10.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic fiscal adjustment; Municipal policy;

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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