The Dynamics of Municipal Fiscal Adjustment

Buettner, Thiess; Wildasin, David E.

doi:10.2139/ssrn.301068

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The Dynamics of Municipal Fiscal Adjustment

32 Pages Posted: 21 Feb 2002

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; CESifo (Center for Economic Studies and Ifo Institute)

University of Kentucky; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA); University of Oxford - Oxford University Centre for Business Taxation

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: Suggested Citation

Buettner, Thiess and Wildasin, David E., The Dynamics of Municipal Fiscal Adjustment (January 2002). Available at SSRN: https://ssrn.com/abstract=301068 or http://dx.doi.org/10.2139/ssrn.301068