Bohn's Test of Fiscal Sustainability of the American State Governments

Saeid Mahdavi

Southern Economic Journal, 2014, vol. 80, issue 4, 1028-1054

Abstract: The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model‐based approach proposed by to test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio (s) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response of s is also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own‐revenue” and “no‐deficit‐carryover” provisions in particular.

Date: 2014
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https://doi.org/10.4284/0038-4038-2012.223

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:80:y:2014:i:4:p:1028-1054

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