Fiscal Illusion � Does It Exist? An Econometric Evaluation

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Author	Amaresh Das, Adnan Omar
ISSN	2307-2466
On Pages	136-140
Volume No.	3
Issue No.	3
Issue Date	May 01, 2020
Publishing Date	May 01, 2020
Keywords	Co integration, unit roots, error correction models, vector auto regressive.

Abstract

Do revenues have a positive causal relationship to expenditures that is, if tax revenues are increased, does spending rise? Or is it the other way round that is if spending rises does revenue rise? Tax revenues in the latter case will rise because of consumer ignorance about the way the tax system works. The latter case may be due to what is called fiscal illusion where a negative causal relationship is expected. Or, is it that there is no equilibrium relationship between revenues and expenditure. The paper probes into the equilibrium relationships first on the basis of Error Correction Models and then proceeds to empirically verifies the revenue-expenditure nexus using annual data from India covering a period from 1985 to 2010.

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