THE DYNAMICS OF MUNICIPAL FISCAL ADJUSTMENT
David E. Wildasin
Martin School of Public Policy
Department of Economics
University of Kentucky
Lexington, KY 40506-0027
The dynamic fiscal policy adjustment of local
jurisdictions is investigated empirically using a panel of more than
1000 U.S. municipalities over a quarter of a century. Distinguishing
own-source revenue, grants, expenditures, and debt service, the
analysis is carried out using a vector error-correction model which
takes account of the intertemporal budget constraint. The results
indicate that a large part of the adjustment in response to fiscal
imbalances takes place by offsetting changes in future
expenditures. In addition, the results show that fiscal imbalances are
financed to a significant extent by subsequent changes in grants.
Decomposition of the sample according to average city population
reveals that the basic pattern of fiscal adjustment is robust,
although intergovernmental grants play a much more pronounced role in
maintaining budget balance for large cities.
David Wildasin / email@example.com
Last updated: September 19, 2005.