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Title:Fiscal equalization schemes and fiscal sustainability PDF Logo
Authors:Potrafke, Niklas
Reischmann, Markus
Issue Date:2012
Series/Report no.:CESifo Working Paper: Public Finance 3948
Abstract:Fiscal sustainability tests have largely ignored the institutional setting of fiscal policy making. Fiscal equalization schemes in federal states are one such institution. We examine whether German state governments pursue sustainable fiscal policies taking into account fiscal equalization transfers. Using panel data techniques we assess fiscal sustainability by investigating whether the debt-to-GDP-ratio has had a positive influence on the primary surplus (Bohn-model). Distinguishing between different measures of the primary surplus we show that including/excluding fiscal transfers changes the results of the Bohn-model. While fiscal equalization transfers do render the fiscal policy of the states sustainable they also provide the states with incentives to increase government spending which, eventually, might render the entire equalization scheme politically unsustainable.
Subjects:fiscal sustainability
institutions
fiscal equalization schemes
panel data
JEL:H77
H72
H62
C23
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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