Fiscal regimes and sustainability: insights from post-war Germany (1950-2023)

This work investigates fiscal sustainability and the prevailing fiscal regime in the Federal Republic of Germany. First, using annual data from 1950 to 2023, the analysis assesses the time series properties of key fiscal variables via unit root tests that account for multiple structural breaks (Carrion-i Silvestre et al. 2009). The long-term relationship between the primary balance and government debt is then estimated using a single-equation error correction model (SECM). The results from this long-term analysis do not support the hypothesis of fiscal sustainability, and the SECM proves inconclusive in identifying a dominant fiscal regime, showing a statistically insignificant long-run coefficient and bidirectional Granger causality. To analyze recent fiscal dynamics, this work then employs the local projections method described by Jordà (2005) on quarterly data from 2002 to 2023. In stark contrast to the long-term findings, this impulse response analysis reveals a clear Money-Dominant (MD) regime. A discretionary positive shock to the primary balance leads to a significant a decrease in real government debt, a result consistent with the MD regime. The divergent findings suggest that while Germany’s long-run fiscal framework is ambiguous, its policy dynamics in the 21st century have been characteristic for sustainable fiscal practices.