The Dynamics of Municipal Fiscal Adjustment

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 revenue, 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 adjustment in response to fiscal imbalances takes place by offsetting changes in future expenditures. In addition, the results point to an important role of grants in maintaining budget balance as fiscal imbalances resulting from lower revenues and higher expenditures including debt service are to a significant extent financed by subsequent 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 for large cities as well as for cities with a high debt burden.dynamic fiscal policy, US municipalities

The Dynamics of Municipal Fiscal Adjustment

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.

The Dynamics of Municipal Fiscal Adjustment

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-source revenue, 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 adjustment in response to fiscal imbalances takes place by offsetting changes in future expenditures. In addition, the results show that fiscal imbalances are financed to a significant extent by subsequent changes in grants. Decomposition of the sample according to average city population reveals that the basic pattern of fiscal adjustment is robust, although intergovernmental grants play a much more pronounced role in maintaining budget balance for large cities.