Asymmetric and Non-Linear Adjustments in Local Fiscal Policy

We analyse the revenue-expenditure patterns of local governments, allowing for asymmetric and non-linear adjustments of local spending and taxation to disequilibrium errors. Our results provide evidence of a downward inflexibility of both local government spending and local taxation, pointing to a budget-maximising local government.fiscal federalism, fly-paper effect, non-linear time-series, asymmetric adjustment

Asymmetric and non-linear adjustments in local fiscal policy

We analyse the revenue-expenditure patterns of local governments, allowing for asymmetric and non-linear adjustments of local spending and taxation to disequilibrium errors. Our results provide evidence of a downward inflexibility of both local government spending and local taxation, pointing to a budget-maximising local government

Spend-and-Tax Adjustments and the Sustainability of the Government's Intertemporal Budget Constraint

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.intertemporal budget constraint, sustainability, non-linear error-correction, fiscal reaction function

Debt Sustainability and Financial Crises: Evidence from the GIIPS

We assess the sustainability of the public finances of Greece, Ireland, Italy, Portugal and Spain (GIIPS), allowing for possible non-linearities in the form of threshold behaviour of the fiscal authorities. We provide some evidence of fiscal sustainability when debt gets “too high” relative to a threshold which is not necessarily fixed but varies with the level of debt relative to its recent history and/or the occurrence of a financial crisis. However, the Greek and Italian debt-to-GDP threshold levels (over which adjustment takes place) exceed 87% and rise further in periods of financial crises. This arguably adds to international investors’ concerns, and as a result, raises the yields demanded for holding Greek and Italian debt. As debt is rolled over at high interest rates, fiscal prospects worsen making default more likely and adding to contagion effects from one Eurozone country to another.debt sustainability, financial crisis

Debt sustainability and financial crises: Evidence from the GIIPS

We assess the sustainability of the public finances of Greece, Ireland, Italy, Portugal and Spain (GIIPS), allowing for possible non-linearities in the form of threshold behaviour of the fiscal authorities. We provide some evidence of fiscal sustainability when debt gets too high relative to a threshold which is not necessarily fixed but varies with the level of debt relative to its recent history and/or the occurrence of a financial crisis. However, the Greek and Italian debt-to-GDP threshold levels (over which adjustment takes place) exceed 87% and rise further in periods of financial crises. This arguably adds to international investors' concerns, and as a result, raises the yields demanded for holding Greek and Italian debt. As debt is rolled over at high interest rates, fiscal prospects worsen making default more likely and adding to contagion effects from one Eurozone country to another

Fiscal policy sustainability, economic cycle and financial crises: The case of the GIPS

We extend previous work on the sustainability of the government's intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct large unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only very large budgetary unbalances are corrected

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

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

Contagion Testing in Embryonic Markets Under Alternative Stressful US Market Scenarios

We consolidate alternative ways for identifying stable and stressful scenarios in the S&P 500 market to construct contagion tests for recipient markets vulnerable to disturbances from this source market. The S&P 500 is decomposed into discrete conditions of: (1) Tranquil versus turbulent volatility; (2) Bull versus bear market phases; (3) Normal periods versus asset bubbles and crises. We analyse the relationship between the S&P 500 and major emerging Caribbean stock markets and find that, despite the prominent trade related exposure to the US, financial linkages are much less pronounced than might be expected outside of the Great Recession

Contagion Testing in Embryonic Markets under Alternative Stressful US Market Scenarios

We consolidate alternative ways for identifying stable and stressful scenarios in the S&P 500 market to construct contagion tests for recipient markets vulnerable to disturbances from this source market. The S&P 500 is decomposed into discrete conditions of: (1) Tranquil versus turbulent volatility; (2) Bull versus bear market phases; (3) Normal periods versus asset bubbles and crises. We analyse the relationship between the S&P 500 and major emerging Caribbean stock markets and find that, despite the prominent trade related exposure to the US, financial linkages are much less pronounced than might be expected outside of the Great Recession

Tracing the Genesis of Contagion in the Oil-Finance Nexus

A new procedure to trace the sources of contagion in the oil-finance nexus is proposed. We do this by consolidating veteran rules derived from the empirical oil literature to filter oil supply, global demand, and oil demand shocks into discrete typical and extreme conditions. We show how these identified conditions can then be used to determine the stable and extreme sub-samples for comparing market relationships in the construction of contagion tests. Our original approach is useful for systemic risk assessment in countries vulnerable to oil market shocks. We illustrate the procedure using the dynamic relationships between the international crude oil market and the financial markets of a small oil-exporter