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http://hdl.handle.net/10419/57779
  
Title:Does Wagner's law ruin the sustainability of German public finances? PDF Logo
Authors:Priesmeier, Christoph
Koester, Gerrit B.
Issue Date:2012
Series/Report no.:Discussion Paper, Deutsche Bundesbank 08/2012
Abstract:The empirical and theoretical literature on long-term relationships in public finance is dominated by two approaches: Fiscal sustainability and Wagner's law of an increasing state activity. In this paper, we argue that these two relationships should be analyzed simultaneously and not separately. We show how Wagner's law might influence fiscal sustainability and how the interaction of the two can be modelled using vector error correction models that include public expenditures, revenues and GDP. For Germany, we find strong evidence for Wagner's law throughout the whole period analyzed (1960-2007), while our results indicate sustainability of public finances only until 1973. We show that, for the period after 1973, it is the interaction of permanent expenditure increases and revenue reductions resulting from fiscal policy reactions to the oil crisis and Wagner's law that ruins the sustainability of public finances in Germany. Our findings underline the importance of the German debt brake for re-establishing sustainable public finances even under Wagner's law.
Subjects:Fiscal sustainability
Wagner's law
Structural breaks
Cointegration
Vector error correction models
JEL:H63
H19
H50
E62
ISBN:978-3-86558-805-0
Document Type:Working Paper
Appears in Collections:Discussion Papers, Deutsche Bundesbank

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