Skip to main content

Advertisement

We’d like to understand how you use our websites in order to improve them. Register your interest.

Test of fiscal sustainability and causality hypotheses for Switzerland

Summary

This paper examines the causality between the Swiss federal governments revenue and expenditure over the 1900 to 2002 period by estimating the short- and long-run relation within an error-correction approach that places more emphasis on the long-run relation as a source of the causal link. The results suggest both that the fiscal policy is consistent with the governmental budget constraint — revenue and expenditure are cointegrated, and revenue cause expenditure and vice versa. There is also evidence that World War II had a significant impact on the stability of the cointegrating relation between revenue and expenditure.

References

  1. Alho, Juha, and Reijo Vanne (2006), “On Predictive Distributions of Public Net Liabilities”, International Journal of Forecasting, Vol. 22, pp. 725–733.

  2. Ahiakpor, James, and Saleh Amirkhalkhali (1989), “On the Difficulty of Eliminating Deficits with Higher Taxes: Some Canadian Evidence”, Southern Economic Journal 56, pp. 24–31.

  3. Alesina, Alberto, and Roberto Perotti (1995), “Fiscal Expansion and Fiscal Adjustment in OECD Countries”, NBER Working Paper No. 5214, Cambridge, MA.

  4. Anderson, William, Myles Wallace, and John Warner (1986), “Government Spending and Taxation: What Causes What?”, Southern Economic Journal 56, pp. 24–31.

  5. Baghestani, Hamid, and Robert McNown (1994), “Do Revenue or Expenditure Respond to Budgetary Disequilibria?”, Southern Economic Journal 60, pp. 311–322.

  6. Barro, Robert (1979), “On the Determination of the Public Debt”, Journal of Political Economy 81, pp. 940–971.

  7. Bohn, Henning (1991), “Budget Balance through Revenue or Spending Adjustments? : Some Historical Evidence for the United States”, Journal of Monetary Economics, 27(3), pp. 333–359.

  8. Buchanan, James, and Richard Wagner (1977), “Democracy in Deficit: The Political Legacy of Lord Keynes”, Academic Press New York.

  9. Friedman, Milton (1978), “The Limitations of Tax Limitation”, Policy Review XX, pp. 7–14.

  10. Garrat, Anthony, Kevin Lee, Hashem Pesaran and Shin, Yongcheol (2000), “A Structural Cointegrating VAR Approach to Macroeconometric Modelling”, in S. Holly and M. Weale (eds), Econometric Modelling: Techniques and pplications, Cambridge University Press, Cambridge, pp. 94–131.

  11. Granger, Clive (1983), “Cointegrated Variables and Error Correction Models”, UCSD Discussion Paper No. 83–13a.

  12. Gregory, Allan and Bruce Hansen (1996), “Residual Based Test for Co-Integration in Models with Regime Shifts”, Journal of Econometrics 70, pp. 99–126.

  13. Hasan, Seid, and Abdul Sukar (1995), “Short and Long-Run Dynamics of Expenditure and Revenue and the Government Budget Constraint: Further Evidence”, Journal of Economics 22, pp. 35–42.

  14. Hoover, Kevin, and Steven Sheffrin (1992), “Causation, Spending, and Taxes: Sand in the Sandbox or Tax Collector for the Welfare State?”, American Economic Review 82, pp. 225–248.

  15. Johansen, Soren (1995), “Identifying Restrictions of Linear Equations with Applications to Simultaneous Equations and Cointegration”,Journal of Econometrics 69, pp. 111–132.

  16. Lanne, Marku, Helmut Luetkepohl, and Pentij Saikkonen (2002), “Comparison of Unit Root Tests for Time series with Level Shifts”, Journal of Time Series Analysis 23, pp. 667–685.

  17. Luetkepohl, Helmut, Timo Teraesvirta, and Juergen Wolters (1999), “Investigating Stability and Linearity of a German M1 Money Demand Function”, Journal of Applied Econometrics 14, pp. 511–525.

  18. Manage, Neela, and Michael Marlow (1986), “The Causal Relation between Federal expenditure and Receipts”, Southern Economic Journal 52, pp. 617–629.

  19. Miller, Stephen, and Frederik Russek (1989), “Co-Integration and Error-Correction Models: The Temporal Causality between Government Taxes and Spending”, Southern Economic Journal 57, pp. 221–229.

  20. Osterwald-Lenum, Michael (1992), “A Note with Fractiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics: Four Cases”, Oxford Bulletin of Economics and Statistics 54, pp. 461–472.

  21. Payne, James (2003), “A Survey of International Empirical Evidence on the Tax-Spend Debate”, Public Finance Review 31, pp. 302–324.

  22. Pesaran, Hashem and Shin, Yongcheol (2000), “Structural Analysis of vector Error Correction Models with Exogenous I(0) Variables”, Journal of Econometrics, 97, pp. 293–343.

  23. Prohl, Silika (2007), Cointegration Test of Sustainability of Public Debt. PhD Thesis, University of StGallen.

  24. Ram, Rai (1988), “A Multicountry Perspective on Causality between Government Revenue and Government Expenditure”, Public Finance 43, pp. 261–269.

  25. Saikkonen, Pentti and Helmut Luetkepohl (2000), “Testing for the Cointegrating Rank of a VAR Process with Structural Shifts”, Journal of Business Economic Statistics 18, pp. 451–464.

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Silika Prohl.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Prohl, S. Test of fiscal sustainability and causality hypotheses for Switzerland. Swiss J Economics Statistics 146, 481–506 (2010). https://doi.org/10.1007/BF03399324

Download citation

JEL-Classification

  • C22
  • C23
  • H60

Keywords

  • Budget Deficit
  • Cointegration