IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US-German comparison

  • Buettner, Thiess

This paper considers the role of fiscal equalization in maintaining fiscal balance. It employs a large panel of German municipalities in order to investigate the dynamic fiscal policy adjustment using a vector-error-correction model that explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of fiscal adjustment to revenue shocks takes place by offsetting changes in intergovernmental transfers: in present-value terms about 34 cents of a permanent 1Â [euro] decrease in own revenues are compensated by subsequent changes in fiscal-equalization transfers. Hence, the contribution of intergovernmental transfers in maintaining fiscal balance is found to be two to three times larger than in the case of US municipalities investigated by Buettner and Wildasin [Buettner, T., Wildasin, D.E., 2006. The dynamics of municipal fiscal adjustment. Journal of Public Economics 90, 1115-1132]. Despite fiscal equalization, however, expenditures are not found to display smaller fluctuations in the German case.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 37 (2009)
Issue (Month): 3 (September)
Pages: 417-431

in new window

Handle: RePEc:eee:jcecon:v:37:y:2009:i:3:p:417-431
Contact details of provider: Web page:

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.:

as in new window
  1. von Hagen, Jürgen & Hepp, Ralf, 2000. "Regional risksharing and redistribution in the German federation," ZEI Working Papers B 15-2000, ZEI - Center for European Integration Studies, University of Bonn.
  2. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  3. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December.
  4. Avery, Robert B, 1977. "Error Components and Seemingly Unrelated Regressions," Econometrica, Econometric Society, vol. 45(1), pages 199-209, January.
  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.
  6. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers.
  7. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, vol. 9(4), pages 391-408, August.
  8. Wallace Oates, 2005. "Toward A Second-Generation Theory of Fiscal Federalism," International Tax and Public Finance, Springer, vol. 12(4), pages 349-373, August.
  9. Georges Bresson & Badi H. Baltagi & Alain Pirotte, 2007. "Panel unit root tests and spatial dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 339-360.
  10. S. Bucovetsky, 1997. "Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency," International Tax and Public Finance, Springer, vol. 4(4), pages 463-483, November.
  11. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
  12. B. Dahlby & L. S. Wilson, 1994. "Fiscal Capacity, Tax Effort, and Optimal Equalization Grants," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 657-72, August.
  13. 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.
  14. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
  15. Melitz, Jacques & Zumer, Frederic, 2002. "Regional redistribution and stabilization by the center in Canada, France, the UK and the US:: A reassessment and new tests," Journal of Public Economics, Elsevier, vol. 86(2), pages 263-286, November.
  16. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 3-91, Wharton School Rodney L. White Center for Financial Research.
  17. Robin Boadway & Masayoshi Hayashi, 2002. "An Evaluation of the Risk-Sharing Function of Equalization in Canada," Working Papers 1006, Queen's University, Department of Economics.
  18. Michael Smart, 2004. "Equalization and Stabilization," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 195-208, June.
  19. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  20. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  21. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-38, May.
  22. repec:tpr:qjecon:v:111:y:1996:i:4:p:1081-1110 is not listed on IDEAS
  23. Robin Boadway & Masayoshi Hayashi, 2004. "An Evaluation of the Stabilization Properties of Equalization in Canada," Canadian Public Policy, University of Toronto Press, vol. 30(1), pages 91-109, March.
  24. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jcecon:v:37:y:2009:i:3:p:417-431. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.