Intergovernmental Transfers and Expenditure Arrears

54 Pages Posted: 10 Nov 2016

See all articles by Paolo Chiades

Paolo Chiades

Bank of Italy

Luciano G. Greco

University of Padua - Department of Economics

Vanni Mengotto

Bank of Italy

Luigi Moretti

University of Bologna - Department of Economics

Paola Valbonesi

University of Padua - Department of Economics and Management, DSEA

Date Written: July 21, 2016

Abstract

Local governments may increase expenditure arrears to relax the financial constraints induced by intergovernmental transfer cuts. We assess this hypothesis using information from accounting and financial reports from Italian municipalities for the period 2003-2010. By exploiting the long-lasting effect of the 1977-1978 structural reform of Italian local public finance, we employ an instrumental variable approach to address endogeneity concerns. We find robust empirical evidence that the lower the intergovernmental grants, the larger the use of arrears in public investment expenditures by municipalities. We argue that, when local governments are not subject to effective controls on the formation of arrears but fiscal rules impose binding budget constraints, a cut in intergovernmental transfers can partially diminish the effectiveness of fiscal consolidation at local level.

Keywords: local public finance, fiscal consolidation, fiscal rules, instrumental variables

JEL Classification: H30, H72, H77, C33, C36

Suggested Citation

Chiades, Paolo and Greco, Luciano G. and Mengotto, Vanni and Moretti, Luigi and Valbonesi, Paola, Intergovernmental Transfers and Expenditure Arrears (July 21, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1076. Available at SSRN: https://ssrn.com/abstract=2867452 or http://dx.doi.org/10.2139/ssrn.2867452

Paolo Chiades (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luciano G. Greco

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

Vanni Mengotto

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luigi Moretti

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Paola Valbonesi

University of Padua - Department of Economics and Management, DSEA ( email )

via Del Santo 33
Padova, 35123
Italy
+39+049+8274058 (Phone)

HOME PAGE: http://www.decon.unipd.it

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