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Public debt and growth in German federal states: What can Europe learn?

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  • Mitze, Timo
  • Matz, Florian

Abstract

While there is ample evidence on the linkage between public debt and economic growth for national economies, far fewer investigations have been carried out at the subnational level. In this paper, we therefore study the long- and short-term relationship between regional public debt intensities and economic output (growth) for German federal states between 1970 and 2010. We estimate dynamic error correction models, which account for heterogeneous transmission mechanisms among federal states and the presence of unobserved common factors such as global macroeconomic shocks. Our findings hint at a significantly negative relationship between regional public debt and per capita GDP in the long run. We further demonstrate that this negative long-term effect is not negligible for the interregional differences in per capita GDP levels. Linking our empirical findings to the current policy debate on fiscal consolidation, we show along the lines of the German case that the decision of enacting a constitutional debt brake for subnational governments to limit the degree of discretionary spending policies together with supplementary measures – such as joint capital market operations by the central and state-level governments to lower borrowing costs – may provide new stimuli for a European-wide debate on the feasibility of solid fiscal consolidation.

Suggested Citation

  • Mitze, Timo & Matz, Florian, 2015. "Public debt and growth in German federal states: What can Europe learn?," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 208-228.
  • Handle: RePEc:eee:jpolmo:v:37:y:2015:i:2:p:208-228
    DOI: 10.1016/j.jpolmod.2015.02.003
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    References listed on IDEAS

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    Cited by:

    1. repec:gam:jsusta:v:9:y:2017:i:8:p:1432-:d:108228 is not listed on IDEAS
    2. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2017. "Heterogeneity in the debt-growth nexus: Evidence from EMU countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 470-486.
    3. repec:bla:coecpo:v:35:y:2017:i:4:p:751-766 is not listed on IDEAS
    4. Leno S. Rocha & Frederico S. A. Rocha & Th'arsis T. P. Souza, 2016. "Is the public sector of your country a diffusion borrower? Empirical evidence from Brazil," Papers 1604.07782, arXiv.org.
    5. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Lau, Evan, 2017. "Fiscal sustainability in an emerging market economy: When does public debt turn bad?," Journal of Policy Modeling, Elsevier, vol. 39(1), pages 99-113.
    6. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "The causal relationship between debt and growth in EMU countries," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 974-989.

    More about this item

    Keywords

    Public debt; Fiscal budget rule; Economic growth; German federal states; Panel data;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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