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Non-linear adjustments in fiscal policy

  • Gabriella Legrenzi

    ()

    (Keele University, Department of Economics)

  • Costas Milas

    ()

    (Keele University, Department of Economics)

We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, 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://www.keele.ac.uk/depts/ec/wpapers/kerp0504.pdf
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2005/04.

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Length: 33 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:kee:kerpuk:2005/04
Note: Former versions of this paper have been presented at the American Summer Meeting of the Econometric Society, the annual meeting of the European Public Choice Society and the annual meeting of the Society for Non-Linear Dynamics and Econometrics.
Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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