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The Dynamics of Municipal Fiscal Adjustment

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  • Thiess Buettner

    (Centre for European Economic Research ZEW University of Mannheim)

  • David E. Wildasin

    (University of Kentucky)

Abstract

The dynamic fiscal policy adjustment of local jurisdictions is investigated empirically using a panel of more than 1000 U.S.~municipalities over a quarter of a century. Distinguishing own revenue, grants, expenditures, and debt service, the analysis is carried out using a vector error-correction model which takes account of the intertemporal budget constraint. The results indicate that a large part of the adjustment in response to fiscal imbalances takes place by offsetting changes in future expenditures. In addition, the results point to an important role of grants in maintaining budget balance as fiscal imbalances resulting from lower revenues and higher expenditures including debt service are to a significant extent financed by subsequent increases in grants. Decompositions of the sample according to average city population and initial debt burden reveal significant differences across subsamples. In particular, the role of grants in maintaining budget balance is much more pronounced for large cities as well as for cities with a high debt burden.

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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0309007.

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Length: 32 pages
Date of creation: 29 Sep 2003
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Handle: RePEc:wpa:wuwppe:0309007

Note: Type of Document - .pdf; prepared on linux pc/LaTeX; pages: 32; figures: included
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Web page: http://128.118.178.162

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Keywords: dynamic fiscal policy; US municipalities;

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