Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears
Luigi Moretti and
Paola Valbonesi ()
Economic Modelling, 2019, vol. 77, issue C, 266-275
For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.
Keywords: Expenditure commitments; Fiscal federalism; Fiscal rules; Instrumental variables (search for similar items in EconPapers)
JEL-codes: H30 H72 H77 C33 C36 (search for similar items in EconPapers)
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Working Paper: Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:77:y:2019:i:c:p:266-275
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