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Macro-fiscal volatility and the composition of public spending

Author

Listed:
  • Sara Maria Riscado

    (European University Institute, Department of Economics)

  • Juraj Stančík

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

  • Timo Välilä

    (European Investment Bank, Economic and Financial Studies)

Abstract

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.

Suggested Citation

  • Sara Maria Riscado & Juraj Stančík & Timo Välilä, 2010. "Macro-fiscal volatility and the composition of public spending," Economic and Financial Reports 2010/3, European Investment Bank, Economics Department.
    • Handle: RePEc:ris:eibefr:2010_003
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    References listed on IDEAS

    as
    1. 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.
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    3. Furceri, Davide & Poplawski Ribeiro, Marcos, 2008. "Government spending volatility and the size of nations," Working Paper Series 924, European Central Bank.
    4. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    5. Juan Gonzalez Alegre & Andreas Kappeler & Atanas Kolev & Timo Valila, 2008. "Composition of government investment in Europe: Some forensic evidence," EIB Papers 2/2008, European Investment Bank, Economics Department.
    6. Afonso, António & Furceri, Davide, 2010. "Government size, composition, volatility and economic growth," European Journal of Political Economy, Elsevier, vol. 26(4), pages 517-532, December.
    7. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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