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Intergovernmental transfers and expenditure arrears

Author

Listed:
  • Paolo Chiades

    (Bank of Italy)

  • Luciano Greco

    (University of Padova)

  • Vanni Mengotto

    (Bank of Italy)

  • Luigi Moretti

    (University of Bologna)

  • Paola Valbonesi

    (University of Padova)

Abstract

Local governments may increase expenditure arrears to relax the financial constraints induced by intergovernmental transfer cuts. We assess this hypothesis using information from accounting and financial reports from Italian municipalities for the period 2003-2010. By exploiting the long-lasting effect of the 1977-1978 structural reform of Italian local public finance, we employ an instrumental variable approach to address endogeneity concerns. We find robust empirical evidence that the lower the intergovernmental grants, the larger the use of arrears in public investment expenditures by municipalities. We argue that, when local governments are not subject to effective controls on the formation of arrears but fiscal rules impose binding budget constraints, a cut in intergovernmental transfers can partially diminish the effectiveness of fiscal consolidation at local level.

Suggested Citation

  • Paolo Chiades & Luciano Greco & Vanni Mengotto & Luigi Moretti & Paola Valbonesi, 2016. "Intergovernmental transfers and expenditure arrears," Temi di discussione (Economic working papers) 1076, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1076_16
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    More about this item

    Keywords

    local public finance; fiscal consolidation; fiscal rules; instrumental variables;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - 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
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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