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Macro-fiscal volatility and the composition of public spending

  • Riscado, Sara Maria

    (European University Institute, Department of Economics)

  • Stančík, Juraj

    (CERGE-EI, Charles University Prague and Academy of Sciences of the Czech Republic)

  • Välilä, Timo

    ()

    (European Investment Bank, Economic and Financial Studies)

Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991—2007. Our results suggest that contemporaneous increases in the volatility of regularly collected revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc –type of taxes such as capital taxes tend to favour public consumption spending. A possible explanation to these differences concerns news about the underlying economic conditions embedded in short-term volatility changes: the policy maker may be more inclined to increase public investment in response to persistent changes in the economic conditions, while temporary changes may prompt a reaction on consumption spending.

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Paper provided by European Investment Bank, Economics Department in its series Economic and Financial Reports with number 2010/3.

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Length: 29 pages
Date of creation: 28 Feb 2010
Date of revision:
Handle: RePEc:ris:eibefr:2010_003
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  1. Gonzalez Alegre, Juan & Kappeler, Andreas & Kolev, Atanas & Valila, Timo, 2008. "Composition of government investment in Europe: Some forensic evidence," EIB Papers 2/2008, European Investment Bank, Economics Department.
  2. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  3. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  4. Furceri, Davide & Poplawski Ribeiro, Marcos, 2008. "Government spending volatility and the size of nations," Working Paper Series 0924, European Central Bank.
  5. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  6. Afonso, António & Furceri, Davide, 2008. "Government size, composition, volatility and economic growth," Working Paper Series 0849, European Central Bank.
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