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The dynamic adjustment of local government budgets: Does Spain Behave differently?

  • Albert Sole-Olle
  • Pilar Sorribas-Navarro

    (Universitat de Barcelona)

The aim of this paper is to analyze 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 1988-2006. Our results confirm, first, that municipalities do indeed make adjustments in response to fiscal shocks (i.e., the deficit is stationary in the long run). Second, we find that most of the adjustment to a revenue shock is borne by the municipalities themselves as they proceed to cut expenditures, with a minor role being played by grant financing. By contrast, adjustments to expenditure shocks are shared on largely equal terms by the municipality through the raising of taxes and higher tiers of government through the raising of grants. These results suggest that the viability of the local finance system is feasible with different institutional arrangements.

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Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 226.

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Length: 0 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bar:bedcje:2009226
Contact details of provider: Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
Web page: http://www.ere.ub.es
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  1. Solé-Ollé, Albert & Sorribas-Navarro, Pilar, 2008. "The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain," Journal of Public Economics, Elsevier, vol. 92(12), pages 2302-2319, December.
  2. Mörk, Eva & Sjögren, Anna & Svalelryd, Helena, 2008. "Cheaper child care, more children," Working Paper Series 2008:29, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  3. Jordi Jofre-Monseny & Albert Sole-Olle, 2010. "Tax Differentials in Intraregional Firm Location: Evidence from New Manufacturing Establishments in Spanish Municipalities," Regional Studies, Taylor & Francis Journals, vol. 44(6), pages 663-677.
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  9. Matz Dahlberg & Eva Johansson, 1998. "The revenues-expenditures nexus: panel data evidence from Swedish municipalities," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1379-1386.
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  11. Thiess Buettner, 2007. "Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison," Working Papers 2007-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  12. Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA.
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  14. Javier Suarez Pandiello, 1999. "Fiscal federalism in Spain. The decentralisation: an unfinished work," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0(3), pages 7-39.
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  16. Julia Darby & V. Anton Muscatelli & Graeme Roy, 2005. "Fiscal consolidation and decentralisation: a tale of two tiers," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 169-195, June.
  17. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  18. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-38, May.
  19. Downes, Thomas A. & Dye, Richard F. & McGuire, Therese J., 1998. "Do Limits Matter? Evidence on the Effects of Tax Limitations on Student Performance," Journal of Urban Economics, Elsevier, vol. 43(3), pages 401-417, May.
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  21. Francesc Trillas, 2008. "Regulatory federalism in network industries," Working Papers 2008/8, Institut d'Economia de Barcelona (IEB).
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