Resumen de Bohn's Test of Fiscal Sustainability of the American State Governments

Saeid Mahdavi

• 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 (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.