Lars-Erik Borge, Per Tovmo
Myopic or Constrained by Balanced-Budget Rules? The Intertemporal Spending Behavior of Norwegian Local Governments
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The paper analyzes the intertemporal spending behavior of Norwegian local governments with particular attention to liquidity constraints imposed by balanced-budget rules. The main findings are: (i) On average, local government spending behavior is neither perfectly forward looking nor fully myopic. (ii) Local governments with good fiscal conditions behave more forward looking than other local governments. (iii) A high degree of party fragmentation is associated with less forward-looking behavior. The overall assessment is that the departure from rational forward-looking behavior reflects both liquidity constraints imposed by balanced-budget rules and myopic behavior.