A SIMULTANEOUS EQUATIONS MODEL OF FISCAL POLICY INTERACTIONS* |
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| Authors: | Maarten A Allers J Paul Elhorst |
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| Institution: | 1. Faculty of Economics and Business, Center for Research on Local Government Economics (COELO), University of Groningen, PO Box 800, 9700AV Groningen, The Netherlands. E‐mail: m.a.allers@rug.nl;2. Faculty of Economics and Business, University of Groningen, PO Box 800, 9700AV Groningen, The Netherlands. E‐mail: j.p.elhorst@rug.nl |
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| Abstract: | ABSTRACT Existing studies of fiscal policy interactions are based on single equation (SE) models of either taxation or expenditures, without specifying the underlying social welfare function, without taking account of budget constraints and without allowing for cost differences between jurisdictions. Taking all this into account, we derive an extended version of the linear expenditure system with policy interaction effects. We use this system to simultaneously estimate interactions in both taxation and different spending categories among Dutch municipalities. Our interaction parameters tend to be higher than those estimated using conventional SE models. |
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