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A SIMULTANEOUS EQUATIONS MODEL OF FISCAL POLICY INTERACTIONS *
Author(s) -
Allers Maarten A.,
Elhorst J. Paul
Publication year - 2011
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/j.1467-9787.2010.00687.x
Subject(s) - economics , fiscal policy , welfare , function (biology) , social welfare , econometrics , social welfare function , public economics , microeconomics , macroeconomics , evolutionary biology , political science , law , market economy , biology
Existing studies of fiscal policy interactions are based on single equation (SE) models of either taxation or expenditures, without specifying the underlying social welfare function, without taking account of budget constraints and without allowing for cost differences between jurisdictions. Taking all this into account, we derive an extended version of the linear expenditure system with policy interaction effects. We use this system to simultaneously estimate interactions in both taxation and different spending categories among Dutch municipalities. Our interaction parameters tend to be higher than those estimated using conventional SE models.