Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177366
Authors: 
Feld, Lars P.
Köhler, Ekkehard A.
Wolfinger, Julia
Year of Publication: 
2018
Series/Report no.: 
Arbeitspapier, Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung 03/2018
Abstract: 
In this paper, we extend Henning Bohn's (2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD). In particular, our econometric approach is the first that allows fiscal reaction functions (FRF) to capture unobserved heterogeneous effects from business and fiscal policy cycles. We apply this econometric approach to sub-national public finance data of the German Laender between 1950 and 2015 and find that their fiscal policy only partly meets fiscal sustainability criteria. According to our results, politicians have significantly reacted to increasing debt levels by increasing budget surpluses since 1991. However, time-series evidence for longer periods does not indicate a significant and positive reaction to increasing debt levels in the West German Laender panel.
Subjects: 
Fiscal Sustainability
Public Debt
Panel Data
Cross-Sectional Dependence
JEL: 
H62
H77
H72
C23
Document Type: 
Working Paper

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