Research Area Markets and Politics Research Unit Market Processes and Governance Schwerpunkt Märkte Und Politik Abteilung Marktprozesse Und Steuerung the Political Economy of the German Länder Deficits

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 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. seminars for many helpful comments and suggestions. We thank Alexandra Günther and Walter Becker for providing the data and Julia Gerstung and Anna Kossendey for excellent research assistance. All remaining errors are ours.