Non-linear adjustments in fiscal policy

Gabriella Legrenzi () and Costas Milas

No KERP 2005/04, Keele Economics Research Papers from Centre for Economic Research, Keele University

Abstract: We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, 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; budgetary disequilibria; persistence profile; asymmetries. (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 H20 H50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-mac and nep-pbe
Date: 2005-02
Note: Former versions of this paper have been presented at the American Summer Meeting of the Econometric Society, the annual meeting of the European Public Choice Society and the annual meeting of the Society for Non-Linear Dynamics and Econometrics.
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Working Paper: Non-linear adjustments in fiscal policy (2004)
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