Abstract
This paper assesses fiscal sustainability of the 16 German Laender between 1950 and 2015. We extend Bohn’s (in: Neck and Sturm (eds) Sustainability of public debt, MIT Press, Cambridge, 2008) fiscal sustainability test by allowing for slope heterogeneity and cross-sectional dependence (CD) and apply this econometric model to the German Laender between 1950 and 2015. We find that fiscal policy on the level of the German Laender only partly meets fiscal sustainability criteria. Politicians have reacted significantly to increasing debt levels by increasing budget surpluses only since 1991. Long time-series evidence is not in support of a significant and positive reaction of increasing initial debt levels in every West German Land between 1950 and 2015.
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