Co-Integration and Error-Correction Models: The Temporal Causality between Government Taxes and Spending

Abstract

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The tax-spending nexus: Evidence from a panel of US state–local governments

“…These results are consistent with the findings in favor of the tax-and-spend hypothesis at the subnational level using different data sets and level of aggregation reported by Holtz-Eakin et al (1989), and Payne (1998), as well as those favoring the fiscal synchronization hypothesis reported by Miller and Russek (1990) among others.…”

“…Only a small subset of these was based on US sub-national data. Of these, many employed aggregate US state or local government level data or a single state time series, see for example Ram (1988), Miller and Russek (1990) and Payne (1998). To the best of our knowledge, the only other study comparable to ours was conducted by Holtz-Eakin et al (1989) who applied a panel vector autoregressive model to 171 US municipal governments over the 1972-1980 period.…”

Interdependencies between Biofuel, Fuel and Food Prices: The Case of the Brazilian Ethanol Market

“…The term also opens up the additional channel for Granger Causality [75]. So long as two variables have a common trend, causality (in the Granger sense, not in the structural sense) must exist in at least one direction [76,77] This Granger (or temporal) causality can be detected through the VECM derived from the long-run co-integrating vectors. The analysis also made use of the relevant techniques, variance decompositions (VDCs) and IRFs, to unveil Granger Causality, and to provide an indication of the short-run length.…”

Test of fiscal sustainability and causality hypotheses for Switzerland

“…Using this vector error-correction (VECM) approach, Miller and Russek (1989) find a feedback relation between annual revenue and expenditure for U.S. federal government data over the 1946 to 1987 period and conclude that U.S. fiscal authorities make no spending decisions in isolation from tax decisions, 2 a for U.S. federal government data from 1955 to 1989. Rather, they show that budgetary imbalance (defined, for example, by the error-correction term) is insignificant in the VEC-regression although evidence does exist for short-run causality running from revenue to expenditure.…”