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Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison

Listed author(s):
  • Thiess Buettner


    (Ifo Institute)

A large panel of German municipalities is employed in order to investigate the dynamic fiscal policy adjustment of local jurisdictions using a VEC model which explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of adjustment takes place by offsetting changes in intergovernmental transfers, in particular, in ‘fiscal equalization’ transfers: in present value terms about 34 cents of a one euro decrease in own revenue is compensated by subsequent changes in equalization transfers. The contribution of intergovernmental transfers to restoring fiscal balance, therefore, is about two to three times higher, compared to the case of US municipalities investigated by Buettner and Wildasin (2006). Nevertheless, budget components such as own revenues and general expenditures display larger fluctuations in the German case. This is consistent with the view that fiscal equalization transfers create a moral-hazard problem.

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Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2007-07.

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Length: 29 pages
Date of creation: Oct 2007
Handle: RePEc:ifr:wpaper:2007-07
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