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The Dynamics of Municipal Fiscal Adjustment

Author

Listed:
  • Thiess Buettner

    (Centre for European Economic Research ZEW University of Mannheim)

  • David E. Wildasin

    (University of Kentucky)

Abstract

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 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 point to an important role of grants in maintaining budget balance as fiscal imbalances resulting from lower revenues and higher expenditures including debt service are to a significant extent financed by subsequent increases in grants. Decompositions of the sample according to average city population and initial debt burden reveal significant differences across subsamples. In particular, the role of grants in maintaining budget balance is much more pronounced for large cities as well as for cities with a high debt burden.

Suggested Citation

  • Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwppe:0309007
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    More about this item

    Keywords

    dynamic fiscal policy; US municipalities;

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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