Fiscal Incentive Effects of the German Equalization System
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 LÃ¤nder, this paper finds a positive answer to both questions. Net-recipient states (LÃ¤nder, 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 LÃ¤nder (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.
|Date of creation:||01 Jun 2009|
|Date of revision:|
|Contact details of provider:|| Postal: International Monetary Fund, Washington, DC USA|
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Heppke-Falk, Kirsten H. & Wolff, Guntram B., 2007.
"Moral hazard and bail-out in fiscal federations: evidence for the German Länder,"
Discussion Paper Series 1: Economic Studies
2007,07, Deutsche Bundesbank, Research Centre.
- Kirsten H. Heppke-Falk & Guntram B. Wolff, 2008. "Moral Hazard and Bail-Out in Fiscal Federations: Evidence for the German Länder," Kyklos, Wiley Blackwell, vol. 61(3), pages 425-446, 08.
- Thiess Buettner & David E. Wildasin, 2002.
"The Dynamics of Municipal Fiscal Adjustment,"
CESifo Working Paper Series
649, CESifo Group Munich.
- David E. Wildasin & Thiess Buettner, 2005. "The Dynamics of Municipal Fiscal Adjustment," Working Papers 2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA.
- Peter Claeys & Raúl Ramos & Jordi Suriñach, 2007.
"Fiscal Sustainability Across Government Tiers,"
XREAP2007-14, Xarxa de Referència en Economia Aplicada (XREAP), revised 2007.
- Galí, Jordi & Perotti, Roberto, 2003.
"Fiscal Policy and Monetary Integration in Europe,"
CEPR Discussion Papers
3933, C.E.P.R. Discussion Papers.
- Bharat Trehan & Carl E. Walsh, 1987.
"Common trends, the government's budget constraint, and revenue smoothing,"
Working Papers in Applied Economic Theory
87-11, Federal Reserve Bank of San Francisco.
- Trehan, Bharat & Walsh, Carl E., 1988. "Common trends, the government's budget constraint, and revenue smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 425-444.
- Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Paul Bernd Spahn & Jan Werner, 2007. "Germany at the Junction Between Solidarity and Subsidiarity," Chapters, in: Fiscal Fragmentation in Decentralized Countries, chapter 4 Edward Elgar Publishing.
- Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
- Hauptmeier, Sebastian, 2007. "The Impact of Fiscal Equalization on Local Expenditure Policies: Theory and Evidence from Germany," ZEW Discussion Papers 07-081, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Thiess Buettner, 2007. "Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison," Working Papers 2007-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- Douglas Sutherland & Robert Price & Isabelle Joumard, 2005. "Sub-central government fiscal rules," OECD Economic Studies, OECD Publishing, vol. 2005(2), pages 141-181.
- Jan Werner, 2008. "Fiscal Equalisation among the states in Germany," Working Papers 02-2008, Institute of Local Public Finance.
- Berger, Helge & Holler, Anika, 2007.
"What determines fiscal policy? Evidence from German states,"
2008/12, Free University Berlin, School of Business & Economics.
- Helge Berger & Anika Holler, 2007. "What Determines Fiscal Policy? Evidence from German States," CESifo Working Paper Series 2062, CESifo Group Munich.
- Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:09/124. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.