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This paper examines the short-run effects and dynamics of exogenous shocks to the regular budgets of the local authorities in Israel with emphasis on the reduction in government participation and taking into account the heterogeneity of the local authorities. To accomplish this, the paper uses a panel of 193 local authorities for the years 1996 - 2002 and estimates a dynamic model for the components of the regular budget. This makes it possible to examine the dynamics of fiscal adjustment in response to changes in the size of the deficit and in the components of the budget. The changes in revenue from municipal taxes and other independent revenues, expenditure and participation and equalization grants were estimated by means of a Vector Error Correction model.
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