Simone Salotti

A Comprehensive Analysis of Expenditure Decentralization and of the Composition of Local Public Spending

Sacchi A. and Salotti S. A comprehensive analysis of expenditure decentralization and of the composition of local public spending, Regional Studies. Many industrialized countries have recently implemented fiscal decentralization reforms assigning more spending responsibility to sub-national governments. This paper investigates the causes of the decentralization of different categories of public expenditure in 19 developed countries over the period 1980–2006. Different models for each of the spending functions under analysis are estimated adopting a general-to-specific empirical approach. Results confirm existing findings on the negative link between regional income disparities and expenditure decentralization. A similarly negative relationship is found for a set of demographic variables, leading to the conclusion that macroeconomic and, more importantly, political factors are responsible for the recent increase in decentralization. Finally, the analysis is completed by a study of the factors driving sub-national expenditure composition, with political and demographic changes emerging as the most important determinants.

The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence

Abstract We investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971–2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of fiscal autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization—expenditure versus revenue—and the extent to which independent spending responsibility and taxing powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. Thus, even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the income distribution.

How Regional Inequality Affects Fiscal Decentralisation: Accounting for the Autonomy of Subcentral Governments

The aim of this paper is to analyse the influence of regional economic disparities on the fiscal decentralisation processes in twenty-one OECD countries over the period 1981 to 2005. We use novel and robust measures of fiscal decentralisation based on different degrees of autonomy over both expenditures and taxes granted to subcentral governments. Our results show that high regional economic disparities call for lower fiscal decentralisation. This could be interpreted as the outcome of a bargaining process driven by the relative strength and different incentives of rich and poor regions. Moreover, the extent to which responsibility and decision powers are really left to subcentral governments appears to be crucial. Thus, from a positive point of view, equity considerations seem to suggest avoidance of fiscal decentralisation processes in countries with significant regional economic disparities, notwithstanding the well-known efficiency gains.

Global imbalances and household savings: The role of wealth

Abstract Many claim that fluctuations in U.S. private savings help to create and to sustain global imbalances because of their influence on the current account deficit. To test this claim, this paper investigates the determinants of aggregate household savings using a panel of 18 developed countries for the period 1980–2005. We weave two strands of literature: the first strand from consumer theory, considering specifically the ‘wealth effect’, the second strand from aggregate private savings theory. The original contribution of this paper derives from the main explanatory variables of the household savings function: two measures of household wealth, the first a financial variable and the second a variable for tangible/housing stock. The salience of these variables has not been tested before. The model is then enriched with variables taken from the private savings literature. To find the best technique to estimate the long run savings function, unit root and cointegration tests are carried out, from which evidence of a cointegrating relationship is found. The group means FMOLS is used to estimate the model. The empirical evidence suggests effects consistent with theory: an increase in wealth negatively affects household savings. Furthermore, when important explanatory variables, such as government savings and population dependency ratios, are included in the model, tangible wealth becomes the only kind of wealth to (weakly and negatively) influence household savings in developed countries. In the U.S. however, wealth does not seem to affect household savings negatively, it seems instead that government savings and population changes better explain the decline of savings during the past two decades. This finding provides additional evidence on the issue of global imbalances, and suggests that the recent booms of the stock and the real estate markets should not be blamed for the decline in U.S. household and private savings.

Multifactor Risk Loadings and Abnormal Returns Under Uncertainty and Learning

We explore the time variation of factor loadings and abnormal returns in the context of a four-factor model. Our methodology, based on an application of the Kalman filter and on endogenous uncertainty, overcomes several limitations of competing approaches used in the literature. Besides taking learning into account, it does not rely on any conditioning information, and it only imposes minimal assumptions on the time variation of the parameters. Our estimates capture both short- and long-term fluctuations of risk loadings and abnormal returns, also showing marked variation across US industry portfolios. The results from mean-variance spanning tests indicate that our baseline model yields accurate predictions and can therefore improve pricing and performance measurement.

A comprehensive analysis of expenditure decentralization and of the composition of local public spending

Many countries have recently implemented fiscal decentralization reforms, assigning more functions and spending responsibilities to sub-national governments. In this paper we investigate the reasons behind the decentralization process of different categories of government expenditure (such as health, education, social security and welfare, housing, transports, public order) using IMF and OECD data for 21 developed countries over the period 1972-2006. We pay particular attention to the roles played by the taxing power of sub-national governments and by grants received from upper tiers of government. Then, we also study the determinants of the composition of local expenditure. Using a general-to-specific empirical approach, we adopt different models for each of the spending functions under analysis. This leads to a number of results, not yet reached in the existing literature, on the importance of tax decentralization, demographics, politics, and a number of other socio-economic variables.

Consumption multipliers of different types of public spending: a structural vector error correction analysis for the UK

The aim of this paper is to investigate the relationship between government spending and private consumption in the UK, for which there is scarce previous empirical evidence. We disaggregate public expenditure into three categories and search for the corresponding private consumption multipliers. Our analysis includes the estimation of a structural vector error correction (SVEC) model, using quarterly non-interpolated data for the period 1981:1 – 2007:4. Initially, we estimate negative effects on consumption of shocks to total public spending. Then, using the spending decomposition, we find that while shocks to public wages crowd-out private consumption as predicted by neoclassical models, shocks to the non-systematic component of social spending and government purchases of goods and services generate a positive reaction, so to crowd-in private consumption. Thus, the qualitative and quantitative dimensions of fiscal multipliers on private consumption change across different public spending categories. Our findings suggest that any empirical support of competing theoretical models on the issue would benefit from a disaggregation of government expenditure, rather than focusing on the aggregate measure.

The Euro-dividend: public debt and interest rates in the Monetary Union

The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.

The influence of decentralized taxes and intergovernmental grants on local spending volatility

ABSTRACT The influence of decentralized taxes and intergovernmental grants on local spending volatility. Regional Studies. This paper studies what affects the volatility of sub-central public spending in 20 Organisation for Economic Co-operation and Development (OECD) countries. The evidence based on data from 1972 to 2007 shows that the volatility of intergovernmental grants from upper levels is positively associated with the volatility of local expenditure. On the other hand, the volatility of local tax revenues – mainly that of property taxes – exerts the opposite effect. These findings suggest that making local governments rely more on grants than own tax revenues adversely affects their spending stability. Allowing them to levy autonomously taxes relying on responsive tax bases provides incentives to smooth their expenditure.

The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth

In this paper we evaluate empirically the impact of fiscal policy on two key determinants of long-term growth, i.e., private investment and productivity growth. We mostly focus on a panel of 20 OECD economies from 1970 to 2009, although we also present some estimates based on data for 80 developing economies. Our findings suggest that high public debt adversely affects both aggregate investment spending and productivity growth, through distortions related to the size of the public sector. We also find weak evidence of some nonlinear effects on productivity, with government debt becoming more detrimental when above 85-90% of GDP in advanded economies.