The dynamic adjustment of local government budgets: Does Spain Behave differently?

Albert Solé-Ollé and Pilar Sorribas-Navarro ()

No 226, Working Papers in Economics from Universitat de Barcelona. Espai de Recerca en Economia

Abstract: The aim of this paper is to analyze whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a vector error-correction model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988-2006. Our results confirm, first, that municipalities do indeed make adjustments in response to fiscal shocks (i.e., the deficit is stationary in the long run). Second, we find that most of the adjustment to a revenue shock is borne by the municipalities themselves as they proceed to cut expenditures, with a minor role being played by grant financing. By contrast, adjustments to expenditure shocks are shared on largely equal terms by the municipality through the raising of taxes and higher tiers of government through the raising of grants. These results suggest that the viability of the local finance system is feasible with different institutional arrangements.

JEL-codes: H70 H72 H77 (search for similar items in EconPapers)
Pages: 0 pages
Date: 2009
New Economics Papers: this item is included in nep-geo, nep-pbe, nep-pub and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: The dynamic adjustment of local government budgets: does Spain behave differently? (2012)
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