Testing the Tax Smoothing Hypothesis of Fiscal Policy: some Evidence from Italy

Paper number: 98/13

Paper date: November 1998

Year: 1998

Paper Category: Discussion Paper


Giacomo M Barisone
University of Exeter


This paper tests BarroÕs (1979) tax smoothing model of fiscal policy. The model implies that budget deficits and surpluses are used optimally to minimise the distortionary effects of taxation, given a certain path of spending. The theory has a number of implications both for the statistical time series properties of government budget data and for causality amongst these variables. These implications are derived and tested on a vector autoregression model using annual data for Italy covering the period from 1861 to 1996. The empirical results partially support the tax smoothing hypothesis for the full sample. However, when we consider the post World War II period all of the tests clearly reject the tax smoothing hypothesis.

JEL Classification Nos: E6; H21
Keywords: Fiscal policy, tax smoothing

Corresponding Author: Giacomo M Barisone, Department of Economics, niversity of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263155, fax (44) 1392 263242, email: G.Barisone@exeter.ac.uk


Acknowledgements I would like to thank Campbell Leith, Claudio Morana, Paolo Panteghini and Simon Wren-Lewis for very useful comments and suggestions. I also thank Franco Spinelli for providing me with the data. Any errors are mine alone.