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Fiscal Incentive Effects of the German Equalization System

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  • Sven Jari Stehn
  • Annalisa Fedelino

Abstract

Does reliance on transfers weaken fiscal discipline and encourage pro-cyclical fiscal policies in recipient subnational governments? Using fiscal reaction functions for a panel of the German Länder, this paper finds a positive answer to both questions. Net-recipient states (Länder, benefiting from the transfer system) have not reduced primary expenditure significantly in response to rising deficits, but have instead relied on vertical transfers from the federal government to ensure debt sustainability. Moreover, they have pursued pro-cyclical policies, particularly by raising expenditures in good times. Net-contributing Länder (paying into the transfer system), in contrast, have ensured fiscal sustainability through spending adjustments; they have also been less pro-cyclical. Panel vector auto-regressions confirm these findings.

Suggested Citation

  • Sven Jari Stehn & Annalisa Fedelino, 2009. "Fiscal Incentive Effects of the German Equalization System," IMF Working Papers 09/124, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/124
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    Cited by:

    1. Emilia Mioara CAMPEANU, 2012. "How can be investigated the fiscal policy effects on the Romanian economy?," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 80-87, May.
    2. Alexander Fink & Thomas Stratmann, 2009. "Institutionalized Bailouts and Fiscal Policy: The Consequences of Soft Budget Constraints," CESifo Working Paper Series 2827, CESifo Group Munich.
    3. Carlos Seixas & António Brandão & Manuel Luís Costa, 2013. "Policy Choices by an Incumbent - A Case with Down-Up Problem, Bias Beliefs and Retrospective Voting," FEP Working Papers 485, Universidade do Porto, Faculdade de Economia do Porto.
    4. repec:hpe:journl:y:2016:v:219:i:4:p:35-66 is not listed on IDEAS
    5. Matthaei, Stephan & Stähler, Nikolai, 2016. "Macroeconomic implications of the German financial equalization system," Annual Conference 2016 (Augsburg): Demographic Change 145695, Verein für Socialpolitik / German Economic Association.
    6. Heinemann, Friedrich & Janeba, Eckhard & Moessinger, Marc-Daniel & Schröder, Christoph, 2013. "Revenue autonomy preference in German state parliaments," ZEW Discussion Papers 13-090, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Yeti Nisha Madhoo & Shyam Nath, 2014. "Beneficiary charges: The Cinderella of subnational finance," Chapters,in: Taxation and Development: The Weakest Link?, chapter 11, pages 364-402 Edward Elgar Publishing.
    8. Yeti Nisha Madhoo & Shyam Nath, 2010. "Beneficiary Charges: The Cinderella of Subnational Finance," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1317, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    9. Stegarescu, Dan, 2013. "Does expenditure composition influence the debt level? Evidence from German federal states," Discussion Papers 52/2013, Deutsche Bundesbank.
    10. Ivo Bischoff & Lars-H. Siemers, 2013. "Biased beliefs and retrospective voting: why democracies choose mediocre policies," Public Choice, Springer, vol. 156(1), pages 163-180, July.
    11. repec:kap:copoec:v:28:y:2017:i:3:d:10.1007_s10602-017-9240-3 is not listed on IDEAS

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