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Germany, Regime 1
Germany, Regime 2
Spain, Regime 1
Spain, Regime 2
50 Debt1/0O0 utput R150atio (Pe2r0c0 ent)
300
Figure 3: Empirical Relationship between Debt/Output and Revenue/Output Ratios (excluding
Government Expenditures and Output Deviations).
falling again. This means that Spain did not undergo a fundamental change in policy behavior
like Germany, instead it increased its autonomous government revenue to return to a sustainable
debt/output path.
2.4 Comparison: Germany vs. Spain
Given the previous results we are now able to make a systematic comparison of fiscal behavior in
Germany and Spain. From the estimated coefficients it becomes clear that Spanish fiscal policy
exhibits a stronger countercyclical pattern as indicated by γY , whose median value is twice as
large in Spain than in Germany. Furthermore, we see that revenue/output ratios react much
stronger to increasing expenditure/output ratios in Spain than in Germany. Of greater interest
for our analysis is the relationship between public debt and revenues. This relationship can easily
be analyzed under the exclusion of government expenditures in 2-dimensional space. Figure 3
plots revenue/output vs. debt/output ratios for each of the two regimes in the two countries. We
assigned the constant to the straight lines, as we think that it fundamentally determines the way
a government reacts to rising debt/output ratios for the reasons given above. We can see that
Germany’s fiscal regime 1 leads to substantially higher revenue/output ratios in the presence
of high debt/output ratios than regime 2. Further, we can see that Spain’s regime 1 leads to
the lowest revenue/output ratios in comparison with all other regimes in the two countries. As
Spain’s debt/output ratio has never fallen below 130 % during the sample period, the lower
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