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Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments

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  • Mahdavi, Saeid
  • Westerlund, Joakim
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    Abstract

    Most state (and local) governments in the U.S. operate under formal fiscal rules which limit their ability to run budget deficits and resort to debt financing. A priori, one would expect to find evidence in favor of an intertemporally balanced budget, or fiscal sustainability, for these states, especially those characterized by a relatively high degree of fiscal stringency. We test this hypothesis for a panel of 47 state–local government units (1961–2006) using four budget balance definitions and several subsamples defined based on regional classifications, or presence of certain balanced budget requirements (BBRs). Our results, obtained from panel estimation techniques that allow for general forms of serial and cross-sectional dependence, suggest that a sufficient condition for “strong” sustainability is consistently satisfied for the full sample and all subsamples in relation to balances that include special funds and/or federal grants. However, we find evidence consistent with the “weak” version of sustainability for the full sample and some regional subsamples (particularly Far West dominated by California) in at least one of the two balances that exclude these items. Finally, the BBRs seem to matter only in relation to the sustainability of the more narrowly defined balances. We discuss the implications of these findings for the role of fiscal rules and federal grant policies.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0161893811000950
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 33 (2011)
    Issue (Month): 6 ()
    Pages: 953-969

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    Handle: RePEc:eee:jpolmo:v:33:y:2011:i:6:p:953-969

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    Web page: http://www.elsevier.com/locate/inca/505735

    Related research

    Keywords: Fiscal sustainability; Fiscal stringency; Balance budget rules; State budget; Public finance; Panel cointegration;

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    References

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    Cited by:
    1. Niklas Potrafke & Markus Reischmann, 2012. "Fiscal Equalization Schemes and Fiscal Sustainability," CESifo Working Paper Series 3948, CESifo Group Munich.
    2. C. Randall Henning & Martin Kessler, 2012. "Fiscal federalism: US history for architects of Europe's fiscal union," Essays and Lectures 669, Bruegel.
    3. Chen, Shyh-Wei, 2014. "Testing for fiscal sustainability: New evidence from the G-7 and some European countries," Economic Modelling, Elsevier, vol. 37(C), pages 1-15.
    4. Niklas Potrafke & Markus Reischmann, 2014. "Fiscal Transfers and Fiscal Sustainability," CESifo Working Paper Series 4716, CESifo Group Munich.
    5. Zhao, Bo & Coyne, David, 2013. "Walking a tightrope: are U. S. state and local governments on a fiscally sustainable path?," Working Papers 13-18, Federal Reserve Bank of Boston.
    6. Benjamin Larin & Bernd Süssmuth, 2014. "Fiscal Autonomy and Fiscal Sustainability: Subnational Taxation and Public Indebtedness in Contemporary Spain," CESifo Working Paper Series 4726, CESifo Group Munich.
    7. Heiko T. Burret & Lars P. Feld, 2014. "A Note on Budget Rules and Fiscal Federalism," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 12(1), pages 03-11, 04.

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