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Non-linear adjustments in fiscal policy

This paper provides evidence that the Italian public finances are sustainable, as the country meets its intertemporal budget constraint. Nevertheless, the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, which can have some detrimental economic effects, rather than changes in government spending or policy mixes. Our non-linear analysis, in particular, shows that taxes adjust more rapidly when deviations from the equilibrium level get larger, and that they are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. In order to correct the undesirable trend of high fiscal pressure and high public debt in Italy, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.

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File URL: http://city.eprints.org/1431/1/0406_legrenzi-milas.pdf
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Paper provided by Department of Economics, City University London in its series Working Papers with number 04/06.

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Date of creation: 2004
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Handle: RePEc:cty:dpaper:04/06
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Web page: http://www.city.ac.uk

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  12. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
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  25. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
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