Working Paper

The Fiscal Response to Revenue Shocks

Simon Berset, Martin Huber, Mark Schelker
CESifo, Munich, 2021

CESifo Working Paper No. 8854

We study the impact of fiscal revenue shocks on local fiscal policy. We focus on the very volatile revenues from the immovable property gains tax in the canton of Zurich, Switzerland, and analyze fiscal behavior following large and rare positive and negative transitory revenue shocks. We apply causal machine learning strategies and implement the post-double-selection LASSO estimator to identify the effect of revenue shocks on public finances. We find that local policymakers predominantly smooth transitory fiscal shocks.

Keywords: local public finance, fiscal policy, fiscal shocks
JEL Classification: D700, H110, H710, H720