American Economic Journal:
Applied Economics
ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)
The Dynamic Response of Municipal Budgets to Revenue Shocks
American Economic Journal: Applied Economics
vol. 16,
no. 4, October 2024
(pp. 484–527)
Abstract
We study the fiscal and tax response to intergovernmental grants, exploiting quasi-experimental variation within Germany's fiscal equalization scheme triggered by census revisions of population counts. Municipal budgets do not adjust instantly. Instead, spending and investments adapt within five years to revenue gains, while the adjustment to losses is more rapid. Yet the long-run response is symmetric. The tax response is particularly slow, stretching over more than a decade. Well-known empirical anomalies such as the so-called flypaper effect may thus reflect a short-run phenomenon, while long-run fiscal behavior appears more consistent with standard theories of fiscal federalism.Citation
Helm, Ines, and Jan Stuhler. 2024. "The Dynamic Response of Municipal Budgets to Revenue Shocks." American Economic Journal: Applied Economics, 16 (4): 484–527. DOI: 10.1257/app.20220718Additional Materials
JEL Classification
- E62 Fiscal Policy
- H71 State and Local Taxation, Subsidies, and Revenue
- H72 State and Local Budget and Expenditures
- H77 Intergovernmental Relations; Federalism; Secession
- R51 Finance in Urban and Rural Economies
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