Fiscal Regimes and Sustainability: Insights from Post-War Germany

Antonio Afonso and Joshua Jablonowski

No 12111, CESifo Working Paper Series from CESifo

Abstract: This paper investigates fiscal sustainability and the prevailing fiscal regime in the Federal Republic of Germany. Using annual data from 1950 to 2023, the long-term relationship between the primary balance and government debt is estimated using a single-equation error correction model (SECM). The results from this long-term analysis do not support the hypothesis of fiscal sustainability, and the SECM proves inconclusive in identifying a dominant fiscal regime, showing a statistically insignificant long-run coefficient and bidirectional Granger causality. Moreover, with the local projections method on quarterly data from 2002 to 2023, this impulse response analysis reveals a clear Money-Dominant (MD) regime. A discretionary positive shock to the primary balance leads to a significant a decrease in real government debt, a result consistent with the MD regime. These findings suggest that while Germany’s long-run fiscal framework is ambiguous, its policy dynamics in the 21st century have been characterised as sustainable fiscal practices.

Keywords: fiscal sustainability; fiscal theory of the price level; socal projection (search for similar items in EconPapers)
JEL-codes: C12 C22 E31 E62 E63 H63 (search for similar items in EconPapers)
Date: 2025
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Working Paper: FISCAL REGIMES AND SUSTAINABILITY: INSIGHTS FROM POST-WAR GERMANY (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12111

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