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Panel data modelling and the tax-spend controversy in the euro zone

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This article attempts to differentiate between the debatable tax and spend, spend and tax, fiscal synchronization and institutional separation hypotheses in order to explore empirically the interplay between public expenditures and public revenues in the Economic and Monetary Union (EMU) member states. For this purpose, panel data models are derived to test the validity of the four hypotheses in EMU countries. A notable characteristic of this article is that the four hypotheses are tested by dividing EMU countries into various subgroups and using disaggregated data for government expenditures and revenues. Seeking for the robustness of the empirical evidence, the panel data methods of Generalized Two-Stage Least Squares (GTSLS) and Generalized Method of Moments (GMM) are accordingly applied to identify the relationship between public outlays and taxation receipts. GTSLS and GMM results strongly support the fiscal synchronization hypothesis implying that budget decision-making is significantly influenced by both government expenditures and revenues components.
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Keywords: E62; H11; fiscal synchronization; panel GTSLS and GMM techniques; panel unit roots tests; tax-spend controversy

Document Type: Research Article

Affiliations: Associate Professor in Economics,The Athens University of Economics and Business, 76 Patission StreetAthens 10434, Greece

Publication date: 01 November 2012

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