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Race to the Debt Trap? Spatial Econometric Evidence on Debt in German Municipalities

Diskussionspapiere extern

Frank M. Fossen, Ronny Freier, Thorsten Martin

Berlin: Freie Univ. Berlin, FB Wirtschaftswiss., 2014, 39 S.
(Discussion Paper / School of Business & Economics ; 2014,1)


Through an intertemporal budget constraint, jurisdictions may gain advantages in tax and spending competition by 'competing' on debt. While the existing spatial econometric literature focuses on tax and spending competition, very little is known about spatial interaction via public debt. This paper estimates the spatial interdependence of public debt amongGerman municipalities using a panel on municipalities in the two largest German states from 1999 to 2006. We find significant and robust interaction effects between debt of neighboring municipalities, which we compare to spatial tax and spending interactions. The results indicate that a municipality increases its per capita debt by 16-33 Euro as a reaction to an increase of 100 Euro in neighboring municipalities.

Topics: Public finances

JEL-Classification: C23;H63;H74;R12
Keywords: public debt, tax and spending competition, municipality data, spatial interactions, spatial panel estimation
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