Asymmetric and non linear adjustment in the revenue expenditure models

The purpose of this paper is to empirically analyse the revenue-expenditure models of publicfinance by considering the possibility of non-linear and asymmetric adjustment. A long-runrelationship between general government expenditure and revenues is identified for Italy.Following system-wide shocks, the estimated relationship adjusts slowly to equilibrium,mainly due to complex administrative procedures that add to the sluggishness of taxcollection and undermine the effective monitoring of public spending. Exogeneity of publicexpenditure implies that taxes rather than spending, carry the burden of short-run adjustmentto correct budgetary disequilibria. Allowing for non-linear adjustment and the possibility ofmultiple equilibria, our findings show evidence of asymmetric adjustment around a uniqueequilibrium. In particular, we find that when government expenditure is too high, adjustmentof taxes takes places at a faster rate than when it is too low. Further, there is evidence of a fasteradjustment when deviations from the equilibrium level get larger, pointing to a Leviathan-style,revenue-maximiser government.