Three Essays on Fiscal Federalism and the Role of Intergovernmental Tranfers

This dissertation is composed of three essays, each examining a unique question relating to the role of intergovernmental transfers in fiscal federalism. Using a panel of the 48 contiguous U.S. states along with recent advances in nonstationary panel and spatial econometric methods this dissertation offers a number of important insights into the workings of intergovernmental transfers and therefore a clearer understanding of the interactions among the different layers of government. The third chapter examines the relationship between intergovernmental revenues from the federal government and intergovernmental expenditures to local governments. As observed by Wildasin (2010), there remains remarkable stability in the ratio of state-tolocal transfers to federal-to-state transfers despite the disparate programs being financed by each. Therefore, the purpose of this essay is to examine the extent to which states serve as a conduit for funds from the federal government to local governments. In particular, the research question asks to what degree do federal transfers stimulate transfers to local governments. The fourth chapter explores the direction of causality between tax revenues and expenditures in answering the four hypotheses set forth in the literature: tax-spend, spend-tax, fiscal synchronization, and institutional separation. Furthermore, along with exploring the role served by intergovernmental transfers within the revenue-expenditure nexus, this essay also examines differences relating to the revenue-expenditure nexus between states with relatively higher debt levels and states with low debt levels, in order to better understand the fiscal causal links favorable for debt accumulation. The purpose of the fifth chapter is to ascertain the effect interstate fiscal interactions on the stimulative effect of grants on state level expenditures. The vast literature on fiscal competition suggests that states do not make decisions in isolation, therefore, spatial econometrics are used to capture spillovers and mimicking behavior across states. Following Boarnet and Glazer (2002), the effect of informational externalities arising from grants awarded to neighboring states are examined as well as the effect of spending spillovers from neighboring states. The results show that the flypaper anomaly (i.e. the stimulative effect of grants greater than a pure income effect) can be explained by interstate fiscal interactions

The Relationship between Electricity Prices and Electricity Demand, Economic Growth, and Employment

There is growing concern over the emissions of greenhouse gases in the United States. Policymakers at both the state and national levels have discussed, and in some cases enacted, policies with the goals of reducing energy demand and encouraging the use of more efficient energy technologies. Because these policies will have an effect on the cost of energy, a quantitative examination of the energy demand is warranted. In this project, we estimate the likely effects of increased electricity prices on the demand for electricity, production as measured by Gross State Product (GSP), and employment

Report to Governor’s Blue Ribbon Commission on Tax Reform by Economic Consultants

Excerpts from the executive summary: Two basic points come from our analysis of Kentucky’s tax system: a broader tax base is needed so that revenue can keep pace with future economic growth, and changes are needed to improve Kentucky’s economic competitiveness. Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment. The options we present below can improve future revenue growth and economic competitiveness—which are evaluated with respect to other important factors, such as fairness and simplicity. The Commission should view these options as alternative routes to a different tax system, but with varying implications for adequacy, elasticity, competitiveness, fairness, and simplicity

International Disease Epidemics and the Shadow Economy

Adding to the emerging body of research related to the current coronavirus crisis, this paper studies the impact of disease epidemics on the worldwide prevalence of the shadow or the underground economy. The informal sector undermines compliance with government regulations and lowers tax collections. Our main hypothesis is that epidemics positively impacts the spread of the shadow economy. Using data on nearly 130 nations and nesting the empirical analysis in the broader literature on the drivers of the shadow sector, we find that both the incidence and the intensity of epidemics positively and significantly contribute to the spread of the underground sector. Numerically, a ten percent increase in the intensity of epidemics leads to an increase in the prevalence of the shadow economy by about 2.1 percent. These findings about the spillovers from epidemics have implications for economic policies in the current times of coronavirus. JEL-Codes: I150, K420

An empirical note on structural breaks in the U.S. R & D production function: Semi-endogenous versus schumpeterian growth models

Using data from the U.S. this paper provides new evidence in support of Schumpeterian growth theory. In particular, the second generation growth models discussed by Ha and Howitt (2007) and Madsen (2008) are extended to consider structural breaks in the R&D production function. The results favor the Schumpeterian theory with a shift in the R&D production function over time

The dynamics of the revenue-expenditure nexus: Evidence from U.S. state government finances

Using data from the contiguous US states from 1951 to 2008, this study examines the dynamics of the intertemporal budget constraint to better understand persistent budget deficits. The direction of causality between tax revenues and expenditures is of primary interest in answering the four hypotheses set forth in the literature: tax-spend, spend-tax, fiscal synchronization, and institutional separation. Overall, the results convey evidence in favor of the tax-spend hypothesis. The dynamics differ, however, in that states with relatively higher debt levels respond slower to fiscal imbalances and rely more on expanding debt levels. These results present a clear illustration of the fiscal adjustment mechanism and how states adapt under various institutional restraints. Reprinted by permission of Sage Publications, Inc

Is the shadow economy a bane or boon for economic growth?

This paper uses the theoretical framework developed by Feder (1983) and Ram (1986) to examine interactions (i.e. externalities and intersectoral factor productivity differentials) between the official and unofficial sectors of the economy. Results from the empirical analysis, using data on over 100 countries from 1970 to 2008, suggest that the marginal externality effect of growth in the unofficial sector on the official sector is positive. Further, input productivities are higher in the unofficial sector relative to the official sector. These results are robust using alternate measures of the (unobserved) unofficial economy and across level of development

An Empirical Note on R&D Growth Models with Regional Implications

Using U.S. data from 1960 to 2007 this empirical note re-examines the semi-endogenous and Schumpeterian R&D growth models presented by Ha and Howitt (2007) and Madsen (2008). The empirical results support the Schumpeterian R&D growth model. Specifically, in the long-run increases in R&D expenditures are necessary to counteract lower R&D productiv-ity due to the presence of product proliferation. Furthermore, the study provides a frame-work for further investigation of R&D growth models at the regional level

Tax more or spend less? Asymmetries in the UK revenue-expenditure nexus

Unlike previous research on the causal relationship between government revenues and expenditures in the United Kingdom, this study estimates an asymmetric error correction model within a momentum threshold autoregressive framework over the period 1955-2009. The results indicate that government revenues respond to short-run changes in government expenditures as well as asymmetrically to budgetary disequilibrium. With respect to the asymmetric adjustment, the response of government revenues to a worsening budget is faster (in absolute terms) than to an improving budget. Thus, contrary to previous studies on the UK, the empirical findings lend support for the spend-tax hypothesis. [PUBLICATION ABSTRACT

New evidence on modeling the Phillips curve and time-varying volatility

This study re-examines the expectations augmented Phillips Curve allowing for time-varying volatility investigated by Ewing and Seyfried (2003) over a longer time period. Though there is evidence of time-varying variance associated with inflation, the inclusion of the conditional volatility in the mean equation of the GARCH-in-Mean specification of the Phillips Curve did not indicate a significant connection between higher levels of inflation attributable to volatility as found by Ewing and Seyfried (2003). // ABSTRACT IN ITALIAN: Questo studio riesamina su un periodo più ampio la curva di Phillips aumentata per le aspettative tenendo conto della volatilità analizzata da Ewing e Seyfried (2003). Benché vi sia evidenza di una varianza instabile nel tempo associata all\u27inflazione, l\u27inclusione della volatilità condizionale nella specificazione GARCH-in-Mean della curva di Phillips non individua alcuna relazione significativa tra gli elevati livelli di inflazione attribuibili alla volatilità