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  5. The Dynamic Response of Municipal Budgets to Revenue Shocks

American Economic Journal:
Applied Economics

ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)

The Dynamic Response of Municipal Budgets to Revenue Shocks

  • Ines Helm
  • Jan Stuhler
American Economic Journal: Applied Economics (Forthcoming)

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. Wellknown 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.

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