Skip to main content
SpringerLink
Log in

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

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

References

  • Auerbach, A. J. (2016). Long-term fiscal sustainability in advanced economies. Asia & the Pacific Policy Studies,3, 142–154.

    Article  Google Scholar 

  • Barrios, S., & Martínez, D. (2012). Sub-central government borrowing and regional development differentials under alternative fiscal frameworks. European Economy, Economic Papers,501, 104–141.

    Google Scholar 

  • Barro, R. J. (1981). Output effects of government purchases. Journal of Political Economy,89, 1086–1121.

    Article  Google Scholar 

  • Barro, R. J. (1986). US deficits since world war I. Scandinavian Journal of Economics,88, 195–222.

    Article  Google Scholar 

  • Baskaran, T. (2010). On the link between fiscal decentralization and public debt in OECD countries. Public Choice,145, 351–378.

    Article  Google Scholar 

  • Blöchliger, H. (2013). Fiscal consolidation across government levels—Part 1. How much, what policies? OECD Economics Department working papers, no. 1070, OECD Publishing, Paris.

  • Blömer, M. J., Dolls, M., Fuest, C., Löffler, M., & Peichl, A. (2015). German public finances through the financial crisis. Fiscal Studies,36, 453–474.

    Article  Google Scholar 

  • Bohn, H. (1995). The sustainability of budget deficits in a stochastic economy. Journal of Money, Credit and Banking,27, 257–271.

    Article  Google Scholar 

  • Bohn, H. (1998). The behavior of US public debt and deficits. Quarterly Journal of Economics,113, 949–963.

    Article  Google Scholar 

  • Bohn, H. (2007). Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint? Journal of Monetary Economics,54, 1837–1847.

    Article  Google Scholar 

  • Bohn, H. (2008). The sustainability of fiscal policy in the United States. In R. Neck & J. E. Sturm (Eds.), Sustainability of public debt (pp. 15–49). Cambridge: MIT Press.

    Google Scholar 

  • Bozio, A., Emmerson, C., Peichl, A., & Tetlow, G. (2015). European public finances and the great recession: France, Germany, Ireland, Italy, Spain and the United Kingdom compared. Fiscal Studies,36, 405–430.

    Article  Google Scholar 

  • Buchanan, J. M., & Tullock, G. (1962). The calculus of consent: Logical foundations of constitutional democracy. Ann Arbor: University of Michigan Press.

    Book  Google Scholar 

  • Bundesminsterium der Finanzen (BMF). (2017). EU review of Germany’s public finances: Targets met, challenges remain. Monthly report of the Federal Ministry of Finance April 2017. Retrieved May 17, 2019 from http://www.bundesfinanzministerium.de/Content/EN/Downloads/2017-04-27-stability-programme.pdf?__blob=publicationFile&v=3.

  • Burret, H. T., & Feld, L. P. (2013). Fiscal Institutions in Germany. Swiss Journal of Economics and Statistics,149, 249–290.

    Article  Google Scholar 

  • Burret, H. T., Feld, L. P., & Köhler, E. A. (2016). (Un-) sustainability of public finances in German Laender: A panel time series approach. Economic Modelling,53, 254–265.

    Article  Google Scholar 

  • Burret, H. T., Feld, L. P., & Köhler, E. A. (2017). Fiscal sustainability of the German Laender: Time-series evidence. FinanzArchiv: Public Finance Analysis,73, 103–132.

    Article  Google Scholar 

  • Buti, M., & Carnot, M. (2016). Fiscal space and low interest rates: A eurozone perspective. Vox CEPR’s policy portal. Retrieved May 17, 2019 from http://voxeu.org/article/fiscal-space-and-low-interest-rates-eurozone-perspective.

  • Canuto, O., & Liu, L. (2010). Subnational debt finance and the global financial crisis. World Bank-Economic Premise,13, 1–7.

    Google Scholar 

  • Checherita-Westphal, C., & Ždarek, V. (2017). Fiscal reaction function and fiscal fatigue: Evidence for the euro area. ECB working paper series, no. 2036, Frankfurt.

  • Claeys, P. (2006). Policy mix and debt sustainability: Evidence from fiscal policy rules. Empirica,33, 89–112.

    Article  Google Scholar 

  • Claeys, P., Ramos, R., & Suriñach, J. (2008). Fiscal sustainability across government tiers. International Economics and Economic Policy,5, 139–163.

    Article  Google Scholar 

  • Darby, J., Muscatelli, V. A., & Roy, G. (2005). Fiscal consolidation and decentralisation: A tale of two tiers. Fiscal Studies,26, 169–195.

    Article  Google Scholar 

  • D’Erasmo, P., Mendoza, E. G., & Zhang, J. (2016). What is a sustainable public debt? In J. B. Taylor & H. Uhlig (Eds.), Handbook of macroeconomics (Vol. 2, pp. 2493–2597). Amsterdam: Elsevier.

    Google Scholar 

  • Durlauf, S. N., Navarro, S., & Rivers, D. A. (2016). Model uncertainty and the effect of shall-issue right-to-carry laws on crime. European Economic Review,81, 32–67.

    Article  Google Scholar 

  • Fincke, B., & Greiner, A. (2011). Debt sustainability in Germany: Empirical evidence for federal states. International Journal of Sustainable Economy,3, 235–254.

    Article  Google Scholar 

  • Foremny, D., Sacchi, A., & Salotti, S. (2017). Decentralization and the duration of fiscal consolidation: Shifting the burden across layers of government. Public Choice,171, 359–387.

    Article  Google Scholar 

  • German Council of Economic Experts (GCEE). (2017). Towards a forward-looking economic policy, annual report 2017/18. Statistisches Bundesamt, Wiesbaden.

  • Herzog, B. (2010). Anwendung des Nachhaltigkeitsansatzes von Bohn zur Etablierung eines Frühindikators in den öffentlichen Finanzen. Beitrag zur aktuellen Debatte der Föderalismuskommission II. Kredit und Kapital,43, 183–206.

    Article  Google Scholar 

  • Hodrick, R., & Prescott, E. (1997). Post-war U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking,29, 1–16.

    Article  Google Scholar 

  • Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal,7, 281–312.

    Article  Google Scholar 

  • Joumard, I., Price, R., & Sutherland, D. (2005). Sub-Central Government Fiscal Rules. OECD Economic Studies, 41, 141–181.

    Google Scholar 

  • Kitterer, W. (2007). Nachhaltige Finanz- und Investitionspolitik der Bundesländer. Perspektiven der Wirtschaftspolitik,8(S1), 53–83.

    Article  Google Scholar 

  • Kitterer, W., & Finken, J. (2006). Zur Nachhaltigkeit der Länderhaushalte – eine empirische Analyse. Finanzwissenschaftliche Diskussionsbeiträge/Finanzwissenschaftliches Forschungsinstitut an der Universität zu Köln, No. 06-7, Cologne.

  • Mendoza, E. G., & Ostry, J. D. (2008). International evidence of fiscal solvency: Is fiscal policy “responsible”? Journal of Monetary Economics,55, 1081–1093.

    Article  Google Scholar 

  • Musgrave, R. A. (1959). The theory of public finance. New York: McGraw-Hill.

    Google Scholar 

  • Musgrave, R. A. (1983). Who should tax, where and what? In Ch E McLure (Ed.), Tax assignment in federal countries (pp. 2–19). Canberra: Center for Research on Federal Financial Relations.

    Google Scholar 

  • Newey, W. L., & West, K. D. (1994). Automatic lag selection in covariance matrix estimation. Review of Economic Studies,61, 631–653.

    Article  Google Scholar 

  • Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels. CESifo working paper, no. 1229, Munich.

  • Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica,74, 967–1012.

    Article  Google Scholar 

  • Potrafke, N., & Reischmann, M. (2015). Fiscal transfers and fiscal sustainability. Journal of Money, Credit and Banking,47, 975–1005.

    Article  Google Scholar 

  • Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review,100, 573–578.

    Article  Google Scholar 

  • Schaltegger, C. A., & Feld, L. P. (2009). Are fiscal adjustments less successful in decentralized governments? European Journal of Political Economy,25, 115–123.

    Article  Google Scholar 

  • Schularick, M., & Taylor, A. M. (2012). Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review,102, 1029–1061.

    Article  Google Scholar 

  • Theofilakou, N., & Stournaras, Y. (2012). Government solvency and financial markets: Dynamic panel estimates for the European monetary union. Economics Letters,115, 130–133.

    Article  Google Scholar 

  • Vammalle, C., & Hulbert, C. (2013). Sub-national finances and fiscal consolidation: Walking on thin ice. OECD Regional Development working papers, 2013/02, OECD Publishing, Paris.

  • Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics,69, 709–748.

    Article  Google Scholar 

Download references

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.

Author information

Authors and Affiliations

  1. Walter Eucken Institute, Albert-Ludwigs-University Freiburg, Goethestrasse 10, 79100, Freiburg im Breisgau, Germany

    Lars P. Feld, Ekkehard A. Köhler & Julia Wolfinger

Authors
  1. Lars P. Feld
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ekkehard A. Köhler
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Julia Wolfinger
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lars P. Feld.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 6 and 7.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

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

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-019-09548-7

Keywords

JEL Classification

Search

Navigation