JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Southern Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Southern Economic Journal. FRANK S. RUSSEK Congressional Budget Office Washington, D.C. I. Introduction Several interesting papers have recently considered whether government taxes Granger cause government spending or vice versa. The findings, based on standard Granger [6] causality tests, are not consistent. Manage and Marlow [10] conclude that when evidence of one-way causality exists, federal taxes Granger cause federal spending, while Anderson, Wallace, and Warner [1] conclude that the evidence supports one-way causality in the opposite direction. Ram [11], reexamining the issue, concludes that taxes Granger cause spending at the federal level, but that spending Granger causes taxes at the state and local level. Von Furstenberg, Green, and Jeong [13], in another related article, examine the tax andspend, spend and tax causality issue using a more general vector autoregressive (VAR) model. They introduce, in addition to federal taxes and spending, two economic variables-the GNP gap and the inflation rate, decompose federal spending into several categories, and remove the effects of automatic stabilizers when appropriate. They find little evidence that taxes Granger cause spending, and limited evidence that spending causes taxes-a finding which corresponds most closely to that of Anderson, Wallace, and Warner [1]. Our purpose is to reconsider the causality issue with the aid of co-integration and errorcorrection modeling. Our analysis illustrates with a specific example how sources of causality can be neglected in standard Granger causality tests. Moreover, addressing the question of temporal causality between government taxes and spending provides insight as to how different policies might, or might not, help control the growth of government. The results of our estimating various co-integration and error-correction models with quarterly data suggest bi-directional causality between government taxes and spending, both for the federal, and state and local sectors. This finding counters the conclusions of previous studies. When annual data are used, however, our *This research was completed while Professor Miller was a visiting scholar at the Congressional Budget Office. The views expressed are the authors', and do not necessarily reflect those of the Congressional Budget Office or its staff.

Our paper systematicalh examines the effects of fiscal structure on economic growth. We find that for developing countries, debt-financed increases in government expenditure retard growth and tax-$named increases stimulate growth, while for developed countries, debt-$named increases in government expenditure do not affect growth and tax-$named increases lower growth. We impose the government budget constraint on the regression equations so that the precise changes in j k a l policy can be identified (e.g., the effect of a debt-$named increase in health expenditure), employing a pooled cross-section, time-series sample and fuced-and random-effect methods. (JEL 0 4 , E6)

The emergence of record current-account and fiscal deficits in the United States during the 1980s draws increasing attention to what has become known as the "twin deficit" problem. Conventional wisdom is that a shift to larger government deficits entails a decline in government saving and results in larger trade deficits, Persistently large trade deficits are troublesome because they imply a transfer of wealth to foreigners and possibly a reduction in future generations' living standards. Copyright 1989 Western Economic Association International.

This paper reviews competing views regarding interest rates and other economic effects of federal deficits. It discusses the findings of several empirical studies that have analyzed these relationships. The main points ofthe paper are that: (a) the con-cept of the deficit is ambiguous because not all deficits have the same economic effects, and (b) by slightly modifying existing studies, one is able to produce empirical evidence showing that deficits or debt do indeed raise interest rates and otherwise affect economic activity in ways consistent with the conven-tional view. Copyright 1984 Western Economic Association International.

State and local governments have recently experienced severe budget problems. Many state legislatures and governors have cut spending or raised taxes. Such changes in fiscal structure may restore fiscal balance, but they can have adverse consequences on state and local economic growth. This article examines the relationship between the fiscal structure of state and local government and economic growth in these jurisdictions. Several general conclusions emerge from our analysis. Corporate income taxes play too small a role in state and local finance, and sales taxes too large a role. Education, transportation, and public safety expenditures may receive too much of the fiscal pie.