On the determinants of local government debt: Does one size fit all?

Abstract

This paper analyzes the factors that directly influence levels of debt in Spanish local governments. Specifically, the main objective is to find out the extent to which indebtedness is originated by controllable factors that public managers can influence, or whether it hinges on other variables beyond managers’ control. The importance of this issue has intensified since the start of the crisis in 2007, due to the abrupt decline of revenues and, simultaneously, to the stagnation (or even increase) in the levels of costs facing these institutions face. Results can be explored from multiple perspectives, given that the set of explanatory factors is also multiple. However, the most interesting result relates to the varying effect of each covariate depending on each municipality’s specific debt level, which suggests that economic policy recommendations should not be homogeneous across local governments.