Sustainability of German Fiscal Policy and Public Debt: Historical and Time Series Evidence for the Period 1850-2010
AbstractIn the last decades, the majority of OECD countries has experienced a continuous increase in public debt. The European debt crisis has prompted a fundamental re]evaluation of public debt sustainability and the looming threat of sovereign debt default. Due to a multitude of large scale events in its past, Germany is far from being an exception: In fact, Germanyfs peacetime debt]to]GDP (Gross Domestic Product) ratio has never been higher. In this paper, we analyse the sustainability of Germanyfs public finances against the standard theoretical back]ground using a unique database, retrieved from multiple sources covering the period from 1850 to 2010. Multiple currency crises and external events offer anecdotal evidence, contradicting the historical perception of Germany as the poster child of European public finance. Given these corresponding breaks in time series, the empirical analysis is conducted for the sub]periods 1872]1913 and 1950]2010. In addition to an anecdotal his]torical analysis, we conduct formal tests on fiscal sustainability, including tests on stationarity and cointegration and the estimation of Vector Autoregression (VAR) and Vector Error Correction Models (VECM). While we cannot reject the hypothesis that fiscal policy was sustainable in the period before the First World War, the tests allow for a rejection of the hypothesis of fiscal sustainability for the period from 1950 to 2010. This evidence leads to the conclusion that Germanyfs public debt is in dire need of consolidation. Albeit a much needed reform, the incompleteness of the German debt brake will have to be addressed in the coming years, in order to ensure that fiscal consolidation actually takes place.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4135.
Date of creation: 2013
Date of revision:
public debt; sustainability; time series analysis;
Find related papers by JEL classification:
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christoph A. Schaltegger & Lars P. Feld, 2007.
"Are Fiscal Adjustments less Successful in Decentralized Governments?,"
CESifo Working Paper Series
1946, CESifo Group Munich.
- Schaltegger, Christoph A. & Feld, Lars P., 2009. "Are fiscal adjustments less successful in decentralized governments?," European Journal of Political Economy, Elsevier, vol. 25(1), pages 115-123, March.
- Christoph A. Schaltegger & Lars P. Feld, 2007. "Are Fiscal Adjustments less Successful in Decentralized Governments?," CREMA Working Paper Series 2007-06, Center for Research in Economics, Management and the Arts (CREMA).
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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