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The Dynamics of Municipal Fiscal Adjustment

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Author Info
Thiess Buettner (Centre for European Economic Research ZEW University of Mannheim)
David E. Wildasin (University of Kentucky)

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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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Publisher 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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Keywords: dynamic fiscal policy US municipalities

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Find related papers by JEL classification:
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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References listed on IDEAS
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.:
  1. Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA. [Downloadable!]
    Other versions:
  2. Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August. [Downloadable!] (restricted)
    Other versions:
  3. Dillinger, William & Webb, Steven B., 1999. "Fiscal management in federal democracies : Argentina and Brazil," Policy Research Working Paper Series 2121, The World Bank. [Downloadable!]
  4. William H. Hoyt & J. William Harden, 2005. "MSA Location and the Impact of State Taxes on Employment and Population: A Comparison of Border and Interior MSA's," Working Papers 2005-01, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  5. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  6. Clifford J. Carrubba & Matthew Gabel, 2005. "Do Governments Sway European Court of Justice Decision-making?: Evidence from Government Court Briefs," Working Papers 2005-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  7. McKinnon, Ronald I, 1997. "EMU as a Device for Collective Fiscal Retrenchment," American Economic Review, American Economic Association, vol. 87(2), pages 227-29, May. [Downloadable!] (restricted)
  8. Clifford J. Carrubba & Matthew Gabel & Lacey Murrah & Ryan Clough & Elizabeth Montgomery & Rebecca Schambach, 2005. "National Party Politics and Supranational Politics in the European Union: New Evidence from the European Parliament," Working Papers 2005-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  9. Avery, Robert B, 1977. "Error Components and Seemingly Unrelated Regressions," Econometrica, Econometric Society, vol. 45(1), pages 199-209, January. [Downloadable!] (restricted)
  10. Hines, James R, Jr & Thaler, Richard H, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-26, Fall. [Downloadable!] (restricted)
  11. Prud'homme, Remy, 1995. "The Dangers of Decentralization," World Bank Research Observer, Oxford University Press, vol. 10(2), pages 201-20, August.
  12. James M. Poterba, 1995. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. McCarty, Therese A & Schmidt, Stephen J, 1997. "A Vector-Autoregression Analysis of State-Government Expenditure," American Economic Review, American Economic Association, vol. 87(2), pages 278-82, May. [Downloadable!] (restricted)
  14. Trehan, Bharat & Walsh, Carl E., 1988. "Common trends, the government's budget constraint, and revenue smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 425-444. [Downloadable!] (restricted)
    Other versions:
  15. Douglas Holtz-Eakin & Whitney K. Newey & Harvey S. Rosen, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," NBER Working Papers 2180, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Matthew Gabel & Kenneth Scheve, 2005. "Estimating the Effect of Elite Communications on Public Opinion Using Instrumental Variables," Working Papers 2005-02, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  17. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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Full references

Cited by:
(explanations, 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.)

  1. Clifford J. Carrubba & Matthew Gabel, 2005. "Do Governments Sway European Court of Justice Decision-making?: Evidence from Government Court Briefs," Working Papers 2005-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  2. Hikaru Ogawa & David Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," Working Papers 2007-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  3. David E. Wildasin, 2006. "Disasters: Issues for State and Federal Government Finances," Working Papers 2006-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  4. Marko Köthenbürger, 2006. "Ex-Post Redistribution in a Federation: Implications for Corrective Policy," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  5. David E. Wildasin & Thiess Buettner, 2005. "The Dynamics of Municipal Fiscal Adjustment," Working Papers 2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  6. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  7. David Wildasin, 2007. "Pre-Emption: Federal Statutory Intervention in State Taxation," Working Papers 2007-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  8. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
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