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Would better state institutions increase tax collection, or would higher tax collection help improve state institutions? In the absence of conclusive guidance from theory, this paper searches for an empirical answer to this question, using a panel dataset covering 110 non-resource-rich countries from 1996 to 2017. Employing a panel vector error correction model, the paper finds that tax capacity and state institutions cause and reinforce each other for a wide range of country groups. The bi-directional causality results suggest that developing tax capacity and building state institutions need to go hand in hand for best results, particularly in developing countries. Based on the impulse response analyses, the paper also finds that the causal effects in advanced economies are generally low in both directions, while in developing countries, both tax capacity and institutions shocks have larger positive impacts on institutions and tax capacity, respectively.

Econometrics --- Public Finance --- Taxation --- Structure, Scope, and Performance of Government --- Tax Evasion and Avoidance --- 'Panel Data Models --- Spatio-temporal Models' --- Taxation, Subsidies, and Revenue: General --- Multiple or Simultaneous Equation Models --- Multiple Variables: General --- Public finance & taxation --- Econometrics & economic statistics --- Revenue administration --- Vector error correction models --- Subnational tax --- Revenue Administration Fiscal Information Tool (RA-FIT) --- Revenue --- Econometric models --- Panel Data Models --- Spatio-temporal Models

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Some countries support smaller firms through tax incentives in an effort to stimulate job creation and startups, or alleviate specific distortions, such as financial constraints or high regulatory or tax compliance costs. In addition to fiscal costs, tax incentives that discriminate by firm size without specifically targeting R&D investment can create disincentives for firms to invest and grow, negatively affecting firm productivity and growth. This paper analyzes the relationship between size-related corporate income tax incentives and firm productivity and growth, controlling for other policy and firm-level factors, including product market regulation, financial constraints and innovation. Using firm level data from four European economies over 2001–13, we find evidence that size-related tax incentives that do not specifically target R&D investment can weigh on firm productivity and growth. These results suggest that when designing size-based tax incentives, it is important to address their potential disincentive effects, including by making them temporary and targeting young and innovative firms, and R&D investment explicitly.

Taxation --- Corporate Taxation --- Production and Operations Management --- Business Taxes and Subsidies --- Firm Performance: Size, Diversification, and Scope --- Economywide Country Studies: Europe --- 'Panel Data Models --- Spatio-temporal Models' --- Taxation, Subsidies, and Revenue: General --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Macroeconomics: Production --- Public finance & taxation --- Macroeconomics --- Corporate & business tax --- Tax incentives --- Total factor productivity --- Productivity --- Corporate income tax --- Marginal effective tax rate --- Taxes --- Tax policy --- Industrial productivity --- Corporations --- Tax administration and procedure --- United Kingdom --- Panel Data Models --- Spatio-temporal Models

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Productivity growth in Italy has been persistently anemic and has lagged that of the euro area over the period 1999-2015, while the indebtedness of its corporate sector has increased. Using the ORBIS firm-level database, this paper studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms and investigates whether total factor productivity growth varies with the level of corporate indebtedness. We employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, and Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (for example, oil price shocks, labor and product market frictions, and stance of global financial cycle). Filtering out the effects of unobserved common factors and controlling for firmspecific characteristics, we find significant negative effects of persistent corporate debt build-up on total factor productivity growth, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. Our results have strong policy implications, for example the design of the tax system should discourage persistent corporate debt accumulation, and effective and timely frameworks to reduce corporate debt overhangs are essential.

Exports and Imports --- Industries: Manufacturing --- Production and Operations Management --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Macroeconomics: Production --- International Lending and Debt Problems --- Industry Studies: Manufacturing: General --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- 'Panel Data Models --- Spatio-temporal Models' --- Firm Behavior: Empirical Analysis --- Macroeconomics --- International economics --- Manufacturing industries --- Total factor productivity --- Productivity --- Debt burden --- Manufacturing --- Labor productivity --- External debt --- Economic sectors --- Industrial productivity --- Debts, External --- Italy --- Panel Data Models --- Spatio-temporal Models

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Using a dataset covering a large sample of emerging economies (EMEs), we study the relationship between debt and economic performance in bad times. While previous research has shown that private debt buildups exacerbate the duration and intensity of recessions in advanced economies (AEs), we document that this effect is very pronounced in EMEs as well. Moreover, although rapid public debt buildups are unlikely to be the primary trigger of financial crises, in EMEs they are associated with deeper and longer recessions than in AEs. Part of this difference is explained by a less supportive fiscal policy in EMEs during crises.

Debts, Public. --- Debts, Government --- Government debts --- National debts --- Public debt --- Public debts --- Sovereign debt --- Debt --- Bonds --- Deficit financing --- Banks and Banking --- Financial Risk Management --- Macroeconomics --- Public Finance --- Debt Management --- Sovereign Debt --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Financial Crises --- Fiscal Policy --- 'Panel Data Models --- Spatio-temporal Models' --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- International Business Cycles --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Public finance & taxation --- Economic & financial crises & disasters --- Private debt --- Banking crises --- Financial crises --- Fiscal policy --- National accounts --- Debts, Public --- United States --- Panel Data Models --- Spatio-temporal Models

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This paper takes a fresh look at the determinants of reserves holding with the aim of highlighting similarities and differences in the motives for holding reserves among emerging markets (EMs), advanced economies (AEs), and low-income countries (LICs). We apply two panel estimation techniques: fixed effects (FE) and common correlated effects pooled mean group (CCEPMG). FE regression results suggest that precautionary savings motives, both current account- and capital account-related, are generally the most important determinants of reserves holding across country groups and that their importance has increased for AEs and LICs since the global financial crisis while receding for EMs. Mercantilist motives matter mostly for EMs. Intertemporal motives have been gaining importance everywhere over time. The CCEPMG results confirm the importance of precautionary motives and suggest that current account motives matter only for EMs and LICs and capital account motives matter for all groups while being more important for EMs in both the shortand long runs. The CCEPMG results also point to the importance of taking into account unobserved common factors that affect coefficient estimates and the dynamic process through which reserves adjust to changes. At about 0.6, the speed of adjustment to the long-run equilibrium implies that more than half of the gap between actual and desired reserve holdings is closed within a year.

Exports and Imports --- Foreign Exchange --- Macroeconomics --- Banks and Banking --- 'Panel Data Models --- Spatio-temporal Models' --- Central Banks and Their Policies --- Financial Crises --- Current Account Adjustment --- Short-term Capital Movements --- International Investment --- Long-term Capital Movements --- Monetary Policy --- International economics --- Currency --- Foreign exchange --- Economic & financial crises & disasters --- Banking --- Capital account --- Capital inflows --- Current account --- Exchange rate arrangements --- Global financial crisis of 2008-2009 --- Balance of payments --- Reserves accumulation --- Central banks --- Capital movements --- Global Financial Crisis, 2008-2009 --- Foreign exchange reserves --- China, People's Republic of --- Panel Data Models --- Spatio-temporal Models