2004), The Political Economy of the German Länder Deficit

We analyze the deficits of the German Länder for the period from 1960 to 2005 and test a number of hypotheses derived from the literature on the political economy of public expenditures and public deficits. Estimating a dynamic panel data model, we find evidence for political opportunism in the spirit of Rogoff and Sibert: German voters seem to favor fiscal discipline as debt issue is significantly lower in pre-election years. As suggested by the theory, coalition governments issue significantly more debt than single party governments. There is no evidence for partisan behavior; party ideology plays a negligible role. Strategic debt issue may occur when the probability of reelection is small. Our results suggest that this kind of political instability has no impact on debt issue