Intergovernmental transfers and expenditure arrears

Paolo Chiades (), Luciano Greco, Vanni Mengotto (), Luigi Moretti and Paola Valbonesi
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Paolo Chiades: Bank of Italy
Vanni Mengotto: Bank of Italy

No 1076, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Local governments may increase expenditure arrears to relax the financial constraints induced by intergovernmental transfer cuts. We assess this hypothesis using information from accounting and financial reports from Italian municipalities for the period 2003-2010. By exploiting the long-lasting effect of the 1977-1978 structural reform of Italian local public finance, we employ an instrumental variable approach to address endogeneity concerns. We find robust empirical evidence that the lower the intergovernmental grants, the larger the use of arrears in public investment expenditures by municipalities. We argue that, when local governments are not subject to effective controls on the formation of arrears but fiscal rules impose binding budget constraints, a cut in intergovernmental transfers can partially diminish the effectiveness of fiscal consolidation at local level.

Keywords: local public finance; fiscal consolidation; fiscal rules; instrumental variables (search for similar items in EconPapers)
JEL-codes: C33 C36 H30 H72 H77 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Intergovernmental transfers and expenditure arrears (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1076_16

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