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Bohn's Test of Fiscal Sustainability of the American State Governments
Author(s) -
Mahdavi Saeid
Publication year - 2014
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2012.223
Subject(s) - revenue , economics , sustainability , fiscal sustainability , recession , debt , state (computer science) , monetary economics , macroeconomics , fiscal policy , finance , mathematics , ecology , algorithm , biology
The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model‐based approach proposed by [Bohn, Henning., 1998] to test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio ( s ) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response of s is also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own‐revenue” and “no‐deficit‐carryover” provisions in particular.