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Debt sustainability in Germany: empirical evidence for federal states

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  • Bettina Fincke
  • Alfred Greiner

Abstract

This paper studies whether the public debt policies of former West German states from 1975 until 2006 were sustainable. We test if the primary surplus relative to GDP is a positive function of the public debt to GDP ratio where we allow for time-varying reaction coefficients by resorting to penalised spline estimation. We also perform stationarity tests with respect to the real budget deficit to gain additional insights. Our analysis suggests that two groups of states can be distinguished, one with states that seem to pursue sustainable debt policies. However, with one exception, even those states are characterised by rising debt to GDP ratios, which is not compatible with sustainability in the long run. For the other group, sustainability can be stated only at a low-significance level or does not seem to be given at all. Thus, all states in the second group should put much more emphasis on stabilising debt.

Suggested Citation

  • Bettina Fincke & Alfred Greiner, 2011. "Debt sustainability in Germany: empirical evidence for federal states," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 3(2), pages 235-254.
    • Handle: RePEc:ids:ijsuse:v:3:y:2011:i:2:p:235-254
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    Citations

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    Cited by:

    1. Niklas Potrafke & Markus Reischmann, 2012. "Fiscal Equalization Schemes and Fiscal Sustainability," ifo Working Paper Series 141, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Burret, Heiko T. & Feld, Lars P. & Köhler, Ekkehard A., 2016. "(Un-)Sustainability of Public Finances in German Laender: A Panel Time Series Approach," Economic Modelling, Elsevier, vol. 53(C), pages 254-265.
    3. Köhler, Ekkehard, 2015. "Fiscal Sustainability in Cross-Dependent Panels: Evidence from the German L nder," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113104, Verein für Socialpolitik / German Economic Association.
    4. Feld, Lars P. & Köhler, Ekkehard A. & Wolfinger, Julia, 2018. "Modeling fiscal sustainability in dynamic macro-panels with heterogeneous effects: Evidence from German federal states," Freiburg Discussion Papers on Constitutional Economics 18/05, Walter Eucken Institut e.V..
    5. Niklas Potrafke & Markus Reischmann, 2014. "Fiskalische Nachhaltigkeit und Transferzahlungen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 67(07), pages 17-22, April.
    6. Niklas Potrafke & Markus Reischmann, 2015. "Fiscal Transfers and Fiscal Sustainability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 975-1005, August.
    7. Heiko T. Burret & Lars P. Feld & Ekkehard A. Köhler, 2014. "Panel Cointegration Tests on the Fiscal Sustainability of German Laender," CESifo Working Paper Series 4929, CESifo Group Munich.

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