The revenues-expenditures nexus: panel data evidence from Swedish municipalities

This paper examines the dynamic relationship between local government revenues and expenditures in Sweden. Results from a panel of 265 municipalities covered over the time period 1974-87 show that (i) expenditures cause revenues, while revenues do not cause expenditures, (ii) intergovernmental grants both cause and are caused by expenditures and revenues, (iii) lags of four years are needed to describe the dynamics among the fiscal variables and (iv) the parameters of the expenditures equation are time varying. These results cast doubt on static modeling of local government activities and on models imposing time invariant parameters without ever testing for it.