FISCAL REGIMES AND SUSTAINABILITY: INSIGHTS FROM POST-WAR GERMANY

Antonio Afonso and Joshua Jablonowski

No 2025/0392, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

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; Local Projection. (search for similar items in EconPapers)
JEL-codes: C12 C22 E31 E62 E63 H63 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-eec and nep-his
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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:ise:remwps:wp03922025

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