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Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison

Author

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  • Thiess Buettner

    (Ifo Institute)

Abstract

A large panel of German municipalities is employed in order to investigate the dynamic fiscal policy adjustment of local jurisdictions using a VEC model which explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of adjustment takes place by offsetting changes in intergovernmental transfers, in particular, in ‘fiscal equalization’ transfers: in present value terms about 34 cents of a one euro decrease in own revenue is compensated by subsequent changes in equalization transfers. The contribution of intergovernmental transfers to restoring fiscal balance, therefore, is about two to three times higher, compared to the case of US municipalities investigated by Buettner and Wildasin (2006). Nevertheless, budget components such as own revenues and general expenditures display larger fluctuations in the German case. This is consistent with the view that fiscal equalization transfers create a moral-hazard problem.

Suggested Citation

  • Thiess Buettner, 2007. "Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison," Working Papers 2007-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    • Handle: RePEc:ifr:wpaper:2007-07
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    File URL: http://www.ifigr.org/publication/ifir_working_papers/IFIR-WP-2007-07.pdf
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    Citations

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    Cited by:

    1. Robert P. Inman, 2010. "States in Fiscal Distress," NBER Working Papers 16086, National Bureau of Economic Research, Inc.
    2. Albert Sol魏ll頍 & Pilar Sorribas-Navarro, 2012. "The dynamic adjustment of local government budgets: does Spain behave differently?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3203-3213, September.
    3. Sven Jari Stehn & Ms. Annalisa Fedelino, 2009. "Fiscal Incentive Effects of the German Equalization System," IMF Working Papers 2009/124, International Monetary Fund.
    4. Thiess Büttner & Fédéric Holm-Hadulla, 2008. "Fiscal Equalization: The Case of German Municipalities," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(1), pages 16-20, 04.
    5. David Wildasin, 2009. "State and Local Government Finance in the Current Crisis: Time for Emergency Federal Relief?," Working Papers 2009-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    6. Albert Solé-Ollé & Pilar Sorribas-Navarro, 2012. "The dynamic adjustment of local government budgets: does Spain behave differently?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3203-3213, September.

    More about this item

    Keywords

    Fiscal balance; Intergovernmental transfers; Local governments; Fiscal equalization;
    All these keywords.

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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