Government consumption smoothing in a balanced budget regime
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I investigate government consumption smoothing (sensitivity) under a balanced budget rule in Swedish municipalities. In general, I find Swedish municipalities to be highly consumption sensitive. Municipalities consume 87.6 % out of predicted current revenues in the time period leading up to the implementation of the balanced budget rule, and they consume 76.3 % out of predicted current revenue in the time period following the implementation. Fiscally weak municipalities are found to be more consumption sensitive than fiscally strong municipalities. Very weak municipalities have become more consumption sensitive compared with very strong municipalities since the implementation of the balanced budget rule. Thus, I find indicative evidence that both credit market constraints and formal budget rules such as balanced budget rules increase municipal consumption sensitivity.
KeywordsConsumption smoothing Balanced budget rule Fiscal Federalism
JEL ClassificationH72 H72 D90
I am grateful to comments from Per Tovmo, Eva Mörk, Mikael Elinder, Matz Dahlberg, Mikael Lindahl, Mattias Nordin, Rita Ginja, Jonas Kolsrud, Oskar Tysklind, two anonymous referees, participants at the 2012 ERSA Umeå summer school, and at the UCFS Brown Bag seminar at Uppsala University. I am also grateful for the financial help received from Anna Maria Lundin’s scholarship committee.
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