Modeling Fiscal Sustainability in Dynamic Macro-Panels with Heterogeneous Effects: Evidence from German Federal States

21 Pages Posted: 8 Jun 2018

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Ekkehard A. Koehler

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences

Julia Wolfinger

Walter Eucken Institute

Date Written: April 19, 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.

Keywords: fiscal sustainability, public debt, panel data, cross-sectional dependence

JEL Classification: H620, H770, H720, C230

Suggested Citation

Feld, Lars P. and Koehler, Ekkehard A. and Wolfinger, Julia, Modeling Fiscal Sustainability in Dynamic Macro-Panels with Heterogeneous Effects: Evidence from German Federal States (April 19, 2018). CESifo Working Paper Series No. 6976, Available at SSRN: https://ssrn.com/abstract=3190987

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ekkehard A. Koehler

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg, 79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

Julia Wolfinger

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

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