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Modeling Fiscal Sustainability in Dynamic Macro-Panels with Heterogeneous Effects: Evidence from German Federal States

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  • Lars P. Feld
  • Ekkehard A. Köhler
  • Julia Wolfinger

Abstract

In this paper, we extend Henning Bohn’s (2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD). In particular, our econometric approach is the first that allows fiscal reaction functions (FRF) to capture unobserved heterogeneous effects from business and fiscal policy cycles. We apply this econometric approach to sub-national public finance data of the German Laender between 1950 and 2015 and find that their fiscal policy only partly meets fiscal sustainability criteria. According to our results, politicians have significantly reacted to increasing debt levels by increasing budget surpluses since 1991. However, time-series evidence for longer periods does not indicate a significant and positive reaction to increasing debt levels in the West German Laender panel.

Suggested Citation

  • Lars P. Feld & Ekkehard A. Köhler & Julia Wolfinger, 2018. "Modeling Fiscal Sustainability in Dynamic Macro-Panels with Heterogeneous Effects: Evidence from German Federal States," CESifo Working Paper Series 6976, CESifo.
    • Handle: RePEc:ces:ceswps:_6976
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    Cited by:

    1. Lars P. Feld & Martin Beznoska & Oliver Holtemöller & Hans-Peter Burghof & Ulrike Neyer & Clemens Fuest & Friedrich Heinemann & Thomas König, 2020. "Record Debts to Combat Covid-19 Consequences – What Can the State Afford?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(08), pages 03-32, August.
    2. Lars P. Feld & Ekkehard A. Köhler, 2023. "Standing on the shoulders of giants or science? Lessons from ordoliberalism," Public Choice, Springer, vol. 195(3), pages 197-211, June.
    3. Gozde Es POLAT & Onur POLAT, 2021. "Fiscal sustainability analysis in EU countries: a dynamic macro-panel approach," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 12, pages 219-241, June.
    4. María del Carmen Ramos-Herrera & María A. Prats, 2020. "Fiscal Sustainability in the European Countries: A Panel ARDL Approach and a Dynamic Panel Threshold Model," Sustainability, MDPI, vol. 12(20), pages 1-14, October.
    5. Feld, Lars P., 2018. "The quest for fiscal rules," Freiburg Discussion Papers on Constitutional Economics 18/09, Walter Eucken Institut e.V..
    6. Bury, Yannick & Feld, Lars P., 2020. "Fiscal federalism in Germany," Freiburg Discussion Papers on Constitutional Economics 20/4, Walter Eucken Institut e.V..

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    More about this item

    Keywords

    fiscal sustainability; public debt; panel data; cross-sectional dependence;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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