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Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975-2005

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  • Baskaran, Thushyanthan

Abstract

Cooperative federations are usually characterized by the existence of bailout guarantees and intergovernmental transfer schemes. This paper explores whether such features of cooperative federations lead to subnational soft budget constraints using panel data from the German States covering the 1975-2005 period. The methodology is based on the premise that subnational governments' borrowing will exhibit vertical and horizontal strategic interactions if they operate under soft budget constraints. Therefore, a test for strategic interactions in subnational borrowing can be used to infer whether a cooperative federation like Germany is susceptible to soft budget constraints. The results suggest that state borrowing in Germany exhibited horizontal but not vertical interactions during the time-frame of the analysis. This indicates (i) that German States faced soft budget constraints and (ii) that they were more concerned about the likelihood of a bailout than about its volume.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32537.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:32537

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Keywords: Fiscal federalism; Soft budget constraints; Strategic fiscal interactions;

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Citations

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Cited by:
  1. Mario Jametti & Marcelin Joanis, 2014. "Elections and de facto Expenditure Decentralization in Canada," IdEP Economic Papers 1404, USI Università della Svizzera italiana.
  2. Jens Dietrichson & Lina Maria Ellegård, 2013. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," ERSA conference papers ersa13p598, European Regional Science Association.
  3. Baskaran, Thushyanthan, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," MPRA Paper 48228, University Library of Munich, Germany.
  4. Thushyanthan Baskaran & Zohal Hessami, 2011. "A Tale of Five PIIGS: Soft Budget Constraints and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2011-45, Department of Economics, University of Konstanz.
  5. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
  6. Karsten Mause & Friedrich Groeteke, 2012. "New constitutional “debt brakes” for Euroland? A question of institutional complementarity," Constitutional Political Economy, Springer, vol. 23(4), pages 279-301, December.

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