b) Is the burden of correcting budgetary disequilibria equally shared by changes in revenues and changes in government spending?
Weak exogeneity of government spending implies that the short-run adjustment to correct budgetary disequilibria is entirely performed via changes in taxes, rather than changes in government spending or some policy mixes.
We can interpret this error-correction model as the fiscal authorities' reaction function to budgetary disequilibria, in the sense of deviations of taxes and spending from their long-run sustainable equilibrium.
The negative, and significant, coefficient on the interaction term suggests that tax changes to correct large fiscal disequilibria occur faster in good as opposed to bad times.
Of the four models, the nonlinear one, which allows for disequilibria to interact with the economic cycle, embeds a faster adjustment.
However, the TAR model results suggest the exact opposite: expenditures respond only to above-threshold disequilibria.
The important point is that a range of adjustments to budgetary disequilibria have been allowed for and the earlier results are robust: Revenue increases Granger-cause expenditure changes two quarters later, and the effect is negative and only partially reversed in the following quarter.
This result is robust to incorporating asymmetric, long-run adjustments to budgetary disequilibria (error-correction).
Macroeconomic models to be built for developing countries should also concentrate on the medium run, consider the significance of disequilibria
, study explicitly the determinants of potential output, and analyze the role of competitiveness.
This construction allows, without loss of any information, the examination of the independent responses of each fiscal variable, first, to budgetary disequilibria and, second, to departures from their respective long run relations with GNP.
Both revenues and expenditures adjust to correct disequilibria in their respective relations to GNP.
Based on the error correction model estimates, however, neither revenues nor expenditures respond to budgetary disequilibria, leading to rejection of both the tax-and-spend and the spend-and-tax models of the budgetary process.