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Modeling fiscal sustainability in dynamic macro-panels with heterogeneous effects: evidence from German federal states

Lars Feld (), Ekkehard Köhler () and Julia Wolfinger
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Julia Wolfinger: Walter Eucken Institute, Albert-Ludwigs-University Freiburg

International Tax and Public Finance, 2020, vol. 27, issue 1, No 9, 215-239

Abstract: Abstract This paper assesses fiscal sustainability of the 16 German Laender between 1950 and 2015. We extend Bohn’s (in: Neck and Sturm (eds) Sustainability of public debt, MIT Press, Cambridge, 2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD) and apply this econometric model to the German Laender between 1950 and 2015. We find that fiscal policy on the level of the German Laender only partly meets fiscal sustainability criteria. Politicians have reacted significantly to increasing debt levels by increasing budget surpluses only since 1991. Long time-series evidence is not in support of a significant and positive reaction of increasing initial debt levels in every West German Land between 1950 and 2015.

Keywords: Fiscal sustainability; Public debt; Panel data; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C23 H62 H72 H77 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Modeling Fiscal Sustainability in Dynamic Macro-Panels with Heterogeneous Effects: Evidence from German Federal States (2018) Downloads
Working Paper: Modeling fiscal sustainability in dynamic macro-panels with heterogeneous effects: Evidence from German federal states (2018) Downloads
Working Paper: Modeling fiscal sustainability in dynamic macro-panels with heterogenous effects: Evidence from German federal states (2018) Downloads
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DOI: 10.1007/s10797-019-09548-7

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