Spend-and-tax adjustments and the sustainability of the government's intertemporal budget constraint

Arbeitspapier

We apply non-linear error-correction models to the empirical testing of the sustainability of the government's intertemporal budget constraint. Our empirical analysis, based on Italy, shows that the Italian government is meeting its intertemporal budget constraint, in spite of the high levels of public debt. Nevertheless, the burden of correcting budgetary disequilibria is entirely carried out by changes in the average tax rate, with a weakly exogenous government spending, possibly determined by the political process. We document some rigidities of the tax instrument, in terms of downward inflexibility of the average tax rate, not only with respect to its long-run level, but also during periods of decreasing economic growth. Further, we provide some evidence in favour of a non-linear adjustment towards a sustainable long-run equilibrium, as the average tax rate adjusts faster the farther away it is from the equilibrium.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2926

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Model Construction and Estimation ; Model Evaluation, Validation, and Selection ; Taxation, Subsidies, and Revenue: General ; National Government Expenditures and Related Policies: General
• Subject: intertemporal budget constraint ; sustainability ; non-linear error-correction ; fiscal reaction function ; Finanzpolitik ; Budgetrestriktion ; Nachhaltigkeit ; Öffentliche Ausgaben ; Steuerpolitik ; Reaktionsfunktion ; Intertemporale Allokation ; Öffentliche Schulden ; Schätzung ; Italien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Legrenzi, Gabriella Deborah ; Milas, Costas
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/30717
• Last update: 10.03.2025, 11:44 AM CET