Non-linear adjustments in fiscal policy

Gabriella Legrenzi () and Costas Milas

No 04/06, City University Economics Discussion Papers from Department of Economics, City University, London

Abstract: This paper provides evidence that the Italian public finances are sustainable, as the country meets its intertemporal budget constraint. Nevertheless, the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, which can have some detrimental economic effects, rather than changes in government spending or policy mixes. Our non-linear analysis, in particular, shows that taxes adjust more rapidly when deviations from the equilibrium level get larger, and that they are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. In order to correct the undesirable trend of high fiscal pressure and high public debt in Italy, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.

Keywords: general government expenditure; general government revenues; cointegration; persistence profile; asymmetries (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 H20 H50 (search for similar items in EconPapers)
Date: 2004-05-19
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Working Paper: Non-linear adjustments in fiscal policy (2005)
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