Intergovernmental grants and public input provision: theory and evidence from Germany

This paper uses a simple model of fiscal competition between local jurisdictions to analyse the impact of intergovernmental grants on the composition of public spending. We find that a higher degree of redistribution within a system of ?fiscal equalisation? coincides with a smaller overall share of spending on productivity-enhancing public inputs. Furthermore, in order to test the theoretical predictions, we carry out an empirical analysis based on a panel of German states. The results are consistent with the theoretical findings and support the existence of an incentive effect of intergovernmental grants on state expenditure policies. --Fiscal competition,Fiscal equalisation,Intergovernmental grants,Public expenditure,Germany

Public Debt and Economic Growth: a Granger Causality Panel Data Approach

This paper analyses the Granger-causality relationship between the growth of the real GDP per capita and the public debt, here represented by the ratio of the current primary surplus/GDP and the ratio of the gross Government debt/GDP. Using OECD annual data for 20 countries between 1988 and 2001, we adapt the methodology recently applied by Erdil and Yetkiner (2008) and we conclude that there is clear Granger causality and that it is always bi-directional. In addition, our findings point to a heterogeneous behaviour across the different countries. These results have important policy implications since not only does public debt restrain economic growth, but also real GDP per capita growth influences the evolution of public debt. Key words: panel data; public debt and economic growth

Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

This paper uses a simple model of fiscal competition between local jurisdictions to analyse the impact of intergovernmental grants on the composition of public spending. We find that a higher degree of redistribution within a system of ”fiscal equalisation” coincides with a smaller overall share of spending on productivity-enhancing public inputs. Furthermore, in order to test the theoretical predictions, we carry out an empirical analysis based on a panel of German states. The results are consistent with the theoretical findings and support the existence of an incentive effect of intergovernmental grants on state expenditure policies

The impact of fiscal equalization on local expenditure policies : theory and evidence from Germany

This paper uses a simple model of fiscal competition in taxes and public inputs among local jurisdictions to analyze the incentive effects of fiscal equalization transfers. We find that a budget-compensated increase in the contribution rate to a system of fiscal equalization not only induces higher local tax rates (e.g., Koethenbuerger, 2002; Bucovetsky and Smart, 2006) but also lower budgetary shares of the public input to production. The subsequent empirical analysis is based on a rich data set of German municipalities and provides strong evidence for the existence of an incentive of fiscal equalization transfers on local expenditure policies

Expenditure reform in industralised countries: a case study approach

This study examines reforms of public expenditure in industrialised countries over the past two decades. We distinguish ambitious and timid reformers and analyse in detail reform experiences in eight case studies of ambitious reform episodes. We find that ambitious reform countries reduce spending on transfers, subsidies and public consumption while largely sparing education spending. Such expenditure retrenchment is also typically part of a comprehensive reform package that includes improvements in fiscal institutions as well as structural and other macroeconomic reforms. The study finds that ambitious expenditure retrenchment and reform coincides with large improvements in fiscal and economic growth indicators. --public expenditure,expenditure reform,economic growth,deficit,debt,employment,case studies,fiscal institutions

Expenditure reform in industrialised countries: a case study approach

This study examines reforms of public expenditure in industrialised countries over the past two decades. We distinguish ambitious and timid reformers and analyse in detail reform experiences in eight case studies of ambitious reform episodes. We find that ambitious reform countries reduce spending on transfers, subsidies and public consumption while largely sparing education spending. Such expenditure retrenchment is also typically part of a comprehensive reform package that includes improvements in fiscal institutions as well as structural and other macroeconomic reforms. The study finds that ambitious expenditure retrenchment and reform coincides with large improvements in fiscal and economic growth indicators. JEL Classification: H5, H6, O57case studies, debt, deficit, Economic Growth, Employment, expenditure reform, fiscal institutions, public expenditure

Identifying the effects of government spending shocks with and without expected reversal: an approach based on U.S. real-time data

This paper investigates how expectations about future government spending affect the transmission of fiscal policy shocks. We study the effects of two different types of government spending shocks in the United States: (i) spending shocks that are accompanied by an expected reversal of public spending growth below trend; (ii) spending shocks that are accompanied by expectations of future spending growth above trend. We use the Ramey (2011)’s time series of military build-ups to measure exogenous spending shocks, and deviations of forecasts of public spending with respect to past trends, evaluated in real-time, to distinguish shocks into these two categories. Based on a structural VAR analysis, our results suggest that shocks associated with an expected spending reversal exert expansionary effects on the economy and accelerate the correction of the initial increase in public debt. Shocks associated with expected spending growth above trend, instead, are characterized by a contraction in aggregate demand and a more persistent increase in public debt. The main channel of transmission seems to run through agents’ perception of the future macroeconomic environment. JEL Classification: E62, E65, H20Fiscal multipliers, Government spending shocks, real-time data, Spending reversal, Survey of Professional Forecasters

Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany

Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of redistributive grants among governments is introduced into a standard model of tax competition. This basic model is then extended in order to allow for variations in the government objectives at the state level. A subsequent empirical analysis of local tax policy exploits the experience with local fiscal revenue sharing in Germany. The results suggest that attempts of state level governments to extract fiscal resources from the local revenue sharing system exert an upward pressure on tax rates. --Fiscal Equalization,Tax Competition Fiscal Federalism,Germany

Transmission of government spending shocks in the euro area: Time variation and driving forces

This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers. JEL Classification: C32, E62, H30, H50Fiscal transmission mechanism, Government spending shocks, Structural change, Structural vector autoregressions, Time-varying parameter models