Fiscal federalism and interstate risk sharing: empirical evidence from Germany

Using an approach developed by Asdrubali et al. [Quarterly Journal of Economics 111 (1996) 1081] the paper estimates the extent of smoothing of state-specific income shocks to West German states from 1970 to 1997 by federal fiscal institutions. The results show that despite the existence of substantial interregional transfer mechanisms the share of shocks to state income absorbed by fiscal flows is roughly at the same level as in the US.