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The Dynamics of Municipal Fiscal Adjustment

  • David E. Wildasin

    (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky)

  • Thiess Buettner

    ()

    (ifo and Munich University)

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-source 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 show that fiscal imbalances are financed to a significant extent by subsequent changes in grants. Decomposition of the sample according to average city population reveals that the basic pattern of fiscal adjustment is robust, although intergovernmental grants play a much more pronounced role in maintaining budget balance for large cities.

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File URL: http://ifigr.org/publication/ifir_working_papers/IFIR-WP-2005-03.pdf
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Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2005-03.

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Length: 25 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:ifr:wpaper:2005-03
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