The dynamic adjustment of local government budgets: does Spain behave differently?

Albert Solé-Ollé () and Pilar Sorribas-Navarro ()
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Albert Solé-Ollé: Public Finance - UB - Universitat de Barcelona
Pilar Sorribas-Navarro: Public Finance - UB - Universitat de Barcelona

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Abstract: The aim of this paper is to analyze whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a vector error-correction model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988-2006. Our results confirm that Spanish municipalities do indeed make adjustments in response to fiscal shocks (i.e., the deficit is stationary in the long run). We compare our results with those obtained for US and Germany to evaluate if the viability of local finance depends on the institutional arrangement and to analyze how it affects the adjustment patterns. We observe that grants have a more important role in the adjustment process in environments where either they have an equalization objective or where there is no clear rule that determines their distribution. This fact can generate a moral hazard problem: governments tend to spend more due to the expected intervention by the central government. Own revenues have a lower adjustment capacity in environments where subcentral governments have limited fiscal autonomy. These results, however, suggest that the viability of the local finance system is feasible with different institutional arrangements.

Keywords: Social; Sciences; &; Humanities (search for similar items in EconPapers)
Date: 2011-06-25
Note: View the original document on HAL open archive server: https://hal.science/hal-00711451v1
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Citations: View citations in EconPapers (10)

Published in Applied Economics, 2011, ⟨10.1080/00036846.2011.570723⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00711451

DOI: 10.1080/00036846.2011.570723

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