Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

Paolo Chiades, Luciano Greco, Vanni Mengotto, Luigi Moretti and Paola Valbonesi
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Paolo Chiades: Bank of Italy - Bank of Italy
Vanni Mengotto: Bank of Italy - Bank of Italy

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Abstract: 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: Fiscal rules; Instrumental variables; Expenditure commitments; Fiscal federalism (search for similar items in EconPapers)
Date: 2019-03
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Published in Economic Modelling, 2019, 77 (March 2019), pp.266-275. ⟨10.1016/j.econmod.2018.09.008⟩

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Journal Article: Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears (2019)
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:hal:journl:hal-01881787

DOI: 10.1016/j.econmod.2018.09.008

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