Bohn's Test of Fiscal Sustainability of the American State Governments

Abstract

The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model‐based approach proposed byto test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio (s) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components ofsto debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response ofsis also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own‐revenue” and “no‐deficit‐carryover” provisions in particular.