Intergovernmental transfers and 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: Local governments may increase expenditure arrears to relax the financial constraints induced by intergovernmental transfer cuts. We assess this hypothesis using information from accounting and financial reports from Italian municipalities for the period 2003-2010. By exploiting the long-lasting effect of the 1977-1978 structural reform of Italian local public finance, we employ an instrumental variable approach to address endogeneity concerns. We find robust empirical evidence that the lower the intergovernmental grants, the larger the use of arrears in public investment expenditures by municipalities. We argue that, when local governments are not subject to effective controls on the formation of arrears but fiscal rules impose binding budget constraints, a cut in intergovernmental transfers can partially diminish the effectiveness of fiscal consolidation at local level.

Keywords: Instrumental variable method; Fiscal rules; Fiscal consolidation; Local public finance (search for similar items in EconPapers)
Date: 2016-07-01
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Working Paper: Intergovernmental transfers and expenditure arrears (2016)
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