This study examines the long-run causal relationship between government revenues and spending of the Swedish economy over
the period 1722–2011. The results based on hidden cointegration technique and a modified version of the Granger non-causality
test, show that there exists a long-run and asymmetric relationship between government spending and government revenues. Our
estimation results can be summarised into three main empirical findings. First, the government follows a hard budget constraint
and soft budget constraint strategies in the case of negative and positive shocks, respectively. Second, negative shocks to
the fiscal budget are removed fairly quickly compared to positive shocks. Third, bi-directional causality between revenues
and expenditures offers support in favour of the fiscal synchronisation hypothesis. The policy implication is that budget
deficit's reduction could be achieved through government spending cut, accompanied by contemporaneous tax controls.
JEL-Codes:H2 H5 E62
Keywords:Government spending, Government revenue, Hidden cointegration, Fiscal policy, Asymmetry
Forschungsbereich:Makroökonomie und öffentliche Finanzen