Fiscal spillovers among Mexican municipalities: a spatial analysis

This paper investigates the presence and nature of public expenditure spillovers among municipalities in Mexico from 2000 to 2021. Using dynamic spatial panel data models with common factors, it estimates the spatial and temporal interdependence in municipal spending across four expenditure categories: total expenditure, use of services, gross capital formation, and subsidies and social benefits. Results show that municipal governments exhibit incremental spending behaviour and that public goods are largely complementary across space, with significant direct and indirect effects driven by employment rates, household income, federal transfers and population density. Notably, federal transfers have the strongest effects on gross capital formation and use of services expenditures.