Working Paper: NBER ID: w2180
Authors: Douglas Holtz-Eakin; Whitney Newey; Harvey Rosen
Abstract: This paper examines the intertemporal linkages between local government expenditures and revenues. In the terminology that has become standard in the literature on vector autoregression analysis, the issue is whether revenues Granger-cause expenditures, or expenditures Granger-cause revenues. The main results that emerge from an analysis of fiscal data from 171 municipal governments over the period 1972-1980 are that: 1) one or two years are sufficient to summarize the relevant dynamic interrelationships; 2) there are important intertemporal linkages between expenditures, taxes and grants; and 3) past revenues help predict current expenditures, but past expenditures do not alter the future path of revenues. This last finding is contrary to results that have emerged from previous analyses of federal fiscal data, and hence suggests the need for additional research on the differences in the processes generating local and federal decisions.
Keywords: local government; revenues; expenditures; Granger causality; public finance
JEL Codes: H71; H72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past revenues (H27) | current expenditures (H72) |
| past expenditures (H72) | future revenues (D25) |
| current expenditures (H72) | past revenues (H27) |