Housing booms and busts and local fiscal policy

Albert Solé-Ollé () and Elisabet Viladecans-Marsal
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Albert Solé-Ollé: IEB, Universitat de Barcelona

No XREAP2017-14, Working Papers from Xarxa de Referència en Economia Aplicada (XREAP)

Abstract: This paper examines how local governments adjust their spending, savings and taxes in response to a temporary revenue windfall generated by a housing boom and how they cope with the inevitable shortfall that appears during the bust. We focus on Spanish local governments given the intensity of the last housing boom-bust experienced there and the large share of construction-related revenues they obtain. We find, first, that just a small share of the boom windfall was saved, with revenues being used primarily to increase spending (above all, current spending) and (to a lesser extent) cut taxes. Second, we find that the failure to save during the boom is higher in places with less informed voters and more contested elections. Third, we also examine what happens during the bust, and find that these governments had to cut abruptly their spending (above all, capital), raise taxes, and allow deficits to grow. Finally, in places wit less informed voters and more contested elections local governments had more trouble in adjusting during the bust, and they tend to rely more on spending cuts than on tax increases.

Keywords: Tax volatility; forward-looking behavior; policy myopia (search for similar items in EconPapers)
JEL-codes: E62 H72 R5 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2017-12, Revised 2017-12
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-pub
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http://www.xreap.cat/RePEc/xrp/pdf/XREAP2017-14.pdf First version, 2017 (application/pdf)
http://www.xreap.cat/RePEc/xrp/pdf/XREAP2017-14.pdf Revised version, 2017 (application/pdf)

Related works:
Working Paper: Housing booms and busts and local fiscal policy (2017)
Working Paper: Housing booms and busts and local fiscal policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:xrp:wpaper:xreap2017-14

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