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The dynamic adjustment of local government budgets: does Spain behave differently?

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  • Albert Sol魏ll頍
  • Pilar Sorribas-Navarro

Abstract

The aim of this article is to analyse whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a Vector Error Correction Model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988 to 2006. Our results confirm that Spanish municipalities do indeed make adjustments in response to fiscal shocks (i.e. the deficit is stationary in the long run). We compare our results with those obtained for US and Germany to evaluate if the viability of local finance depends on the institutional arrangement and to analyse how it affects the adjustment patterns. We observe that grants have a more important role in the adjustment process in environments where either they have an equalization objective or where there is no clear rule that determines their distribution. This fact can generate a moral hazard problem: governments tend to spend more due to the expected intervention by the central government. Own revenues have a lower adjustment capacity in environments where subcentral governments have limited fiscal autonomy. These results, however, suggest that the viability of the local finance system is feasible with different institutional arrangements.

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  • Albert Sol魏ll頍 & Pilar Sorribas-Navarro, 2012. "The dynamic adjustment of local government budgets: does Spain behave differently?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3203-3213, September.
  • Handle: RePEc:taf:applec:44:y:2012:i:25:p:3203-3213
    DOI: 10.1080/00036846.2011.570723
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    Cited by:

    1. Christofzik, Désirée I. & Schneider, Benny, 2019. "Fiscal policy adjustments to budget shocks: Evidence from German municipalities," Working Papers 10/2019, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    2. Kappeler, Andreas & Solé-Ollé, Albert & Stephan, Andreas & Välilä, Timo, 2013. "Does fiscal decentralization foster regional investment in productive infrastructure?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 15-25.
    3. Helm, Ines & Stuhler, Jan, 2021. "The Dynamic Response of Municipal Budgets to Revenue Shocks," IZA Discussion Papers 14369, Institute of Labor Economics (IZA).
    4. Richard Jaimes, 2020. "Fiscal adjustments at the local level: evidence from Colombia," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1148-1173, October.
    5. Bessho, Shun-ichiro & Ogawa, Hikaru, 2015. "Fiscal adjustment in Japanese municipalities," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1053-1068.
    6. Jaimes, Richard, 2016. "Estimating Fiscal Adjustments at the Local Level in Colombia," MPRA Paper 75507, University Library of Munich, Germany.
    7. Ergete Ferede, 2018. "Alberta’s Fiscal Responses to Fluctuations in Non-Renewable-Resource Revenue," SPP Briefing Papers, The School of Public Policy, University of Calgary, vol. 11(23), September.
    8. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
    9. Simon Berset & Martin Huber & Mark Schelker, 2021. "The fiscal response to revenue shocks," Papers 2101.07661, arXiv.org.
    10. Kappeler, Andreas & Solé-Ollé, Albert & Stephan, Andreas & Välilä, Timo, 2013. "Does fiscal decentralization foster regional investment in productive infrastructure?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 15-25.

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    More about this item

    JEL classification:

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

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