The fiscal response to revenue shocks
This research addresses fiscal policy adaptation for local governments, but it is incremental as it applies existing causal methods to a specific regional context.
The study investigates how local fiscal policy in Zurich, Switzerland, responds to revenue shocks from property taxes, finding that policymakers generally smooth shocks but exhibit fiscal conservatism by cutting spending after negative shocks.
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 revenue shocks. We apply causal machine learning strategies and implement the post-double-selection LASSO estimator to identify the causal effect of revenue shocks on public finances. We show that local policymakers overall predominantly smooth fiscal shocks. However, we also find some patterns consistent with fiscal conservatism, where positive shocks are smoothed, while negative ones are mitigated by spending cuts.