Modeling fiscal sustainability in dynamic macro-panels with heterogeneous effects: evidence from German federal states

Abstract

This paper assesses fiscal sustainability of the 16 German Laender between 1950 and 2015. We extend Bohn’s (in: Neck and Sturm (eds) Sustainability of public debt, MIT Press, Cambridge, 2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD) and apply this econometric model to the German Laender between 1950 and 2015. We find that fiscal policy on the level of the German Laender only partly meets fiscal sustainability criteria. Politicians have reacted significantly to increasing debt levels by increasing budget surpluses only since 1991. Long time-series evidence is not in support of a significant and positive reaction of increasing initial debt levels in every West German Land between 1950 and 2015.

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Acknowledgements

We thank Désirée I. Christofzik (GCEE), Wolf Heinrich Reuter (GCEE), Mustafa Yeter (GCEE), the participants of the annual meeting of the EPCS in Rome 2018 and two referees for valuable comments.

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Correspondence to Lars P. Feld.

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Appendix

See Tables 6 and 7.

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Feld, L.P., Köhler, E.A. & Wolfinger, J. Modeling fiscal sustainability in dynamic macro-panels with heterogeneous effects: evidence from German federal states. Int Tax Public Finance 27, 215–239 (2020). https://doi.org/10.1007/s10797-019-09548-7

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Keywords

  • Fiscal sustainability
  • Public debt
  • Panel data
  • Cross-sectional dependence

JEL Classification

  • H62
  • H77
  • H72
  • C23