Public debt and growth in German federal states: What can Europe learn?

Timo Mitze and Florian Matz

Journal of Policy Modeling, 2015, vol. 37, issue 2, 208-228

Abstract: While there is ample evidence on the linkage between public debt and economic growth for national economies, far fewer investigations have been carried out at the subnational level. In this paper, we therefore study the long- and short-term relationship between regional public debt intensities and economic output (growth) for German federal states between 1970 and 2010. We estimate dynamic error correction models, which account for heterogeneous transmission mechanisms among federal states and the presence of unobserved common factors such as global macroeconomic shocks. Our findings hint at a significantly negative relationship between regional public debt and per capita GDP in the long run. We further demonstrate that this negative long-term effect is not negligible for the interregional differences in per capita GDP levels. Linking our empirical findings to the current policy debate on fiscal consolidation, we show along the lines of the German case that the decision of enacting a constitutional debt brake for subnational governments to limit the degree of discretionary spending policies together with supplementary measures – such as joint capital market operations by the central and state-level governments to lower borrowing costs – may provide new stimuli for a European-wide debate on the feasibility of solid fiscal consolidation.

Keywords: Public debt; Fiscal budget rule; Economic growth; German federal states; Panel data (search for similar items in EconPapers)
JEL-codes: C23 E62 R11 R50 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:37:y:2015:i:2:p:208-228

DOI: 10.1016/j.jpolmod.2015.02.003

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