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The Dynamics of Municipal Fiscal Adjustment


Thiess Buettner


Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute); Ludwig-Maximilians University of Munich

David E. Wildasin


University of Kentucky; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

January 2002

CESifo Working Paper Series No. 649

Abstract:     
The dynamic fiscal policy adjustment of local jurisdictions is investigated empirically using a panel of more than 1000 U.S. municipalities over a quarter of a century. Distinguishing own revenues, grants, expenditures, and debt service, the analysis is carried out using a vector error correction model which takes account of the intertemporal budget constraint. The results indicate that a large part of the fiscal adjustment to changes in any budgetary component takes place by an offsetting change in future expenditures. In addition, the results point to an important role of grants in maintaining budget balance as lower revenues and higher expenditures including debt service are followed by significant increases in grants. Decompositions of the sample according to average city population and initial debt burden reveal significant differences across subsamples. In particular, the role of grants in maintaining budget balance is much more pronounced with large cities whereas small cities tend to rely more on own revenues. Grants also play a more important role in the adjustment of cities with an initially high debt burden.

Number of Pages in PDF File: 32

JEL Classification: H72, H74, H77

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Date posted: February 21, 2002  

Suggested Citation

Buettner, Thiess and Wildasin, David E., The Dynamics of Municipal Fiscal Adjustment (January 2002). CESifo Working Paper Series No. 649. Available at SSRN: http://ssrn.com/abstract=301068

Contact Information

Thiess Buettner (Contact Author)
Ifo Institute for Economic Research ( email )
Poschingerstr. 5
Munich
Germany
CESifo (Center for Economic Studies and Ifo Institute) ( email )
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Ludwig-Maximilians University of Munich
Geschwister-Scholl-Platz 1
Munich, 80539
Germany
David E. Wildasin
University of Kentucky ( email )
Lexington, KY 40546
United States
CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Poschinger Str. 5
Munich, DE-81679
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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