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Fiscal sustainability across government tiers: an assessment of soft budget constraints

Author

Listed:
  • Peter Claeys

    () (Faculty of Economics, University of Barcelona.)

  • Raúl Ramos

    () (Faculty of Economics, University of Barcelona.)

  • Jordi Suriñach

    () (Faculty of Economics, University of Barcelona.)

Abstract

This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of adjustment, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.

Suggested Citation

  • Peter Claeys & Raúl Ramos & Jordi Suriñach, 2007. "Fiscal sustainability across government tiers: an assessment of soft budget constraints," IREA Working Papers 200714, University of Barcelona, Research Institute of Applied Economics, revised Jul 2007.
  • Handle: RePEc:ira:wpaper:200714
    as

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    File URL: http://www.ub.edu/irea/working_papers/2007/200714.pdf
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    References listed on IDEAS

    as
    1. Massimo Bordignon & Gilberto Turati, 2003. "Bailing Out Expectations and Health Expenditure in Italy," CESifo Working Paper Series 1026, CESifo Group Munich.
    2. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 205-259, April.
    3. Redoano, Michela, 2003. "Fiscal Interactions Among European Countries," The Warwick Economics Research Paper Series (TWERPS) 680, University of Warwick, Department of Economics.
    4. Alexander Plekhanov & Raju Singh, 2006. "How Should Subnational Government Borrowing Be Regulated?Some Cross-Country Empirical Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-4.
    5. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
    6. 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, August.
    7. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
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    More about this item

    Keywords

    fiscal policy; fiscal rules; EMU; SGP; fiscal federalism;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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