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We set up a model to characterize the reaction functions of governments competing for mobile capital by simultaneously setting both the business tax rate as well as the level of provision of a productive public input. Using a rich data set of local jurisdictions, we then test the predictions of the model with respect to the nature of strategic interaction among governments. Our findings from efficient estimation of a system of spatially interrelated equations for both policy instruments support the notion that local governments use both the business tax rate and public inputs to compete for capital. In particular, we find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing spending on public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending on public inputs.

Die Problematik der öffentlichen Verschuldung in Deutschland hat sich in den vergangenen Jahren erheblich verschärft. Im Zuge der Wiedervereinigung ist der öffentliche Schuldenstand stark gestiegen, und die laufenden Defizite übersteigen seit Jahren die Budgetregeln des Vertrags von Maastricht. Dies führt dazu, dass ein stetig wachsender Anteil der Steuereinnahmen in den öffentlichen Haushalten für den Schuldendienst aufgewendet werden muss. So betrug die Zins-Steuer-Quote des Bundes im Jahr 2004 19,4 vH. Hinzu kommt, dass die zu erwartende demographische Entwicklung langfristig zu einem deutlichen Anstieg der öffentlichen Ausgaben, beispielsweise im Bereich der Alterssicherungssysteme, führen wird. Der finanzpolitische Handlungsspielraum wird dadurch auf allen staatlichen Ebenen in zunehmendem Maße eingeschränkt. Der ZEW/Bertelsmann Schuldenmonitor greift diese Problematik im Rahmen einer langfristigen Tragfähigkeitsanalyse der öffentlichen Haushalte auf.

This paper is linked to two debates on fiscal policies: first, the implications of low interest-growth differentials for debt sustainability and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The Stability and Growth Pact's debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in the low-growth low-inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of in ation from the central bank's objective; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter's complexity without the need to revise the EU Treaties.

We assess the fiscal behaviour in the European Union countries for the period 1990-2005 via the responsiveness of budget balances to several determinants. The results show that the existence of effective fiscal rules, the degree of public spending decentralization, and the electoral cycle can impinge on the country's fiscal position. Furthermore, the results also support the responsiveness of primary balances to government indebtedness.

We assess the fiscal behaviour in the European Union countries for the period 1990-2005 via the responsiveness of budget balances to several determinants. The results show that the existence of effective fiscal rules, the degree of public spending decentralization, and the electoral cycle can impinge on the country's fiscal position. Furthermore, the results also support the responsiveness of primary balances to government indebtedness.

We assess the fiscal behaviour in the European Union countries for the period 1990- 2005 via the responsiveness of budget balances to several determinants. The results show that the existence of effective fiscal rules, the degree of public spending decentralization, and the electoral cycle can impinge on the country's fiscal position. Furthermore, the results also support the responsiveness of primary balances to government indebtedness.

We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities should increases relative to other assets.