The Dynamic Response of Municipal Budgets to Revenue Shocks

72 Pages Posted: 24 May 2021

See all articles by Ines Helm

Ines Helm

Stockholm University - Department of Economics

Jan Stuhler

Universidad Carlos III de Madrid

Multiple version iconThere are 3 versions of this paper

Date Written: 2021

Abstract

We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany’s fiscal equalization scheme triggered by Census revisions of official population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while adjustment to revenue losses is more rapid. Yet, the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical “anomalies” in public finance such as the flypaper effect are thus primarily a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.

JEL Classification: H710, H720, H770, E620

Suggested Citation

Helm, Ines and Stuhler, Jan, The Dynamic Response of Municipal Budgets to Revenue Shocks (2021). CESifo Working Paper No. 9083, Available at SSRN: https://ssrn.com/abstract=3849861

Ines Helm (Contact Author)

Stockholm University - Department of Economics ( email )

Universitetsvägen 10 A
House A, floor 4 and 7
Frescati, Stockholm
Sweden

Jan Stuhler

Universidad Carlos III de Madrid

CL. de Madrid 126
Madrid, 28903
Spain

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