The Dynamics of Municipal Fiscal Adjustment

32 Pages Posted: 21 Feb 2002  

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)

Date Written: January 2002

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.

JEL Classification: H72, H74, H77

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: https://ssrn.com/abstract=301068

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, Bavaria 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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