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The Displacement Effect in the Growth of Governments

Gabriella Legrenzi
Public Choice
Vol. 120, No. 1/2 (Jul., 2004), pp. 191-204
Published by: Springer
Stable URL: http://www.jstor.org/stable/30025835
Page Count: 14
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The Displacement Effect in the Growth of Governments
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Abstract

We analyze the displacement effect within a multivariate revenue-expenditure model of government growth, based on a long historical dataset, for Italy. Our long-run analysis shows a permanent influence of domestic product on the growth of governments, supporting Wagner's law. The short-run dynamics are more complex and provide some evidence for the displacement effect, in terms of a lower resistance against tax-financing of government spending in the post-war. In addition, government spending adjusts faster when deviations from its equilibrium get larger.

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