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Budgetary shocks and revenue adjustment: How governments respond to unexpected fiscal shocks

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  • T. Snoddon

Abstract

This paper uses panel data from seven Canadian provinces which received Equalization payments over the period 1980/81 to 1995/96 to examine how provinces adjust own-source revenue in response to past budget shocks. Governments respond symmetrically to past own-source revenue shocks: they increase or reduce own-revenue by $0.75 for every unexpected dollar shock in own-source revenue last year. In contrast, revenue responses to past grant shocks are asymmetric. Provinces lower own-source revenue by $0.87 in response to an unexpected extra dollar from Equalization last year. But, they make no adjustment following an unexpected Equalization shortfall. The magnitude of these responses suggest that provinces see a significant component of these shocks to be persistent. Lastly, the results with respect to past spending shocks are mixed. In contrast to recent empirical results on asymmetric responses to changes in grants, the results in this paper suggest that, at least in the short run, unexpected increases in Equalization are unlikely to have a large, stimulative effect on government spending. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • T. Snoddon, 2004. "Budgetary shocks and revenue adjustment: How governments respond to unexpected fiscal shocks," Economics of Governance, Springer, vol. 5(2), pages 149-166, July.
    • Handle: RePEc:spr:ecogov:v:5:y:2004:i:2:p:149-166
    DOI: 10.1007/s10101-003-0070-6
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    Cited by:

    1. Christofzik, Désirée I. & Schneider, Benny, 2019. "Fiscal policy adjustments to budget shocks: Evidence from German municipalities," Working Papers 10/2019, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    2. Hotz, Joffre & Unterschultz, James R., 2009. "Hedging Alberta Government's Oil and Gas Revenue: Is Acting Like a Farmer a Viable Strategy?," Staff Paper Series 91401, University of Alberta, Department of Resource Economics and Environmental Sociology.

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