Fiscal stringency and fiscal sustainability : panel evidence from the American state and local governments

Mahdavi, Saeid and Westerlund, Joakim 2011, Fiscal stringency and fiscal sustainability : panel evidence from the American state and local governments, Journal of policy modeling, vol. 33, no. 6, November-December, pp. 953-969.

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Title Fiscal stringency and fiscal sustainability : panel evidence from the American state and local governments
Author(s) Mahdavi, Saeid
Westerlund, Joakim
Journal name Journal of policy modeling
Volume number 33
Issue number 6
Season November-December
Start page 953
End page 969
Total pages 17
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2011-11
ISSN 0161-8938
1873-8060
Keyword(s) fiscal sustainability
fiscal stringency
balance budget rules
state budget
public finance
panel cointegration
Summary Most state (and local) governments in the U.S. operate under formal fiscal rules which limit their ability to run budget deficits and resort to debt financing. A priori, one would expect to find evidence in favor of an intertemporally balanced budget, or fiscal sustainability, for these states, especially those characterized by a relatively high degree of fiscal stringency. We test this hypothesis for a panel of 47 state–local government units (1961–2006) using four budget balance definitions and several subsamples defined based on regional classifications, or presence of certain balanced budget requirements (BBRs). Our results, obtained from panel estimation techniques that allow for general forms of serial and cross-sectional dependence, suggest that a sufficient condition for “strong” sustainability is consistently satisfied for the full sample and all subsamples in relation to balances that include special funds and/or federal grants. However, we find evidence consistent with the “weak” version of sustainability for the full sample and some regional subsamples (particularly Far West dominated by California) in at least one of the two balances that exclude these items. Finally, the BBRs seem to matter only in relation to the sustainability of the more narrowly defined balances. We discuss the implications of these findings for the role of fiscal rules and federal grant policies.
Language eng
Field of Research 159999 Commerce, Management, Tourism and Services not elsewhere classified
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2011, Society for Policy Modeling
Persistent URL http://hdl.handle.net/10536/DRO/DU:30046283

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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