Modeling fiscal sustainability in dynamic macro-panels with heterogenous effects: Evidence from German federal states

Arbeitspapier

In this paper, we extend Henning Bohn's (2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD). In particular, our econometric approach is the first that allows fiscal reaction functions (FRF) to capture unobserved heterogeneous effects from business and fiscal policy cycles. We apply this econometric approach to sub-national public finance data of the German Laender between 1950 and 2015 and find that their fiscal policy only partly meets fiscal sustainability criteria. According to our results, politicians have significantly reacted to increasing debt levels by increasing budget surpluses since 1991. However, time-series evidence for longer periods does not indicate a significant and positive reaction to increasing debt levels in the West German Laender panel.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Arbeitspapier ; No. 03/2018

Classification and Topics

• Classification: Wirtschaft ; National Deficit; Surplus ; Intergovernmental Relations; Federalism; Secession ; State and Local Budget and Expenditures ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
• Subject: Fiscal Sustainability ; Public Debt ; Panel Data ; Cross-Sectional Dependence

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Feld, Lars P. ; Köhler, Ekkehard A. ; Wolfinger, Julia
• Event: Veröffentlichung
• (who): Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung
• (where): Wiesbaden
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/177366
• Last update: 10.03.2025, 11:45 AM CET