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The Elusive Costs and the Immaterial Gains of Fiscal Constraints

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  • Canova, Fabio
  • Pappa, Evi

Abstract

We study whether and how fiscal restrictions alter the business cycle features macrovariables for a sample of 48 US states. We also examine the 'typical' transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.

Suggested Citation

  • Canova, Fabio & Pappa, Evi, 2005. "The Elusive Costs and the Immaterial Gains of Fiscal Constraints," CEPR Discussion Papers 5406, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5406
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    2. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 645-673, September.
    3. Hans Gersbach, 2014. "Government Debt-Threshold Contracts," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 444-458, January.
    4. Chatagny, Florian, 2015. "Incentive effects of fiscal rules on the finance minister's behavior: Evidence from revenue projections in Swiss Cantons," European Journal of Political Economy, Elsevier, vol. 39(C), pages 184-200.
    5. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    6. Bernard Steunenberg, 2021. "The politics within institutions for regulating public spending: conditional compliance within multi-year budgets," Constitutional Political Economy, Springer, vol. 32(1), pages 31-51, March.
    7. Minjie Deng and Chang Liu, 2024. "Public Financing Under Balanced Budget Rules," Discussion Papers dp24-04, Department of Economics, Simon Fraser University.
    8. Marina Azzimonti-Renzo, 2013. "The political economy of balanced budget amendments," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-20.
    9. Christofzik, Désirée I. & Kessing, Sebastian G., 2018. "Does fiscal oversight matter?," Journal of Urban Economics, Elsevier, vol. 105(C), pages 70-87.
    10. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2014. "The International Dimension Of Productivity And Demand Shocks In The Us Economy," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 153-176, February.
    11. Markus Kirchner & Jacopo Cimadomo & Sebastian Hauptmeier, 2010. "Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces," Tinbergen Institute Discussion Papers 10-021/2, Tinbergen Institute.
    12. Stefano Gnocchi, 2013. "Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 187-216, April.
    13. Alesina, A. & Passalacqua, A., 2016. "The Political Economy of Government Debt," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2599-2651, Elsevier.
    14. Pappa, Evi & Bermperoglu, Dimitrios & Vella, Eugenia, 2013. "Spending-based austerity measures and their effects on output and unemployment," CEPR Discussion Papers 9383, C.E.P.R. Discussion Papers.
    15. Marco Buti & João Nogueira Martins & Alessandro Turrini, 2007. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CESifo Economic Studies, CESifo Group, vol. 53(1), pages 115-152, March.
    16. Evi Pappa, 2009. "The effects of fiscal expansions: an international comparison," Working Papers 409, Barcelona School of Economics.
    17. Heinemann, Friedrich & Nover, Justus, 2023. "State-owned enterprises, fiscal transparency, and the circumvention of fiscal rules: The case of Germany," ZEW Discussion Papers 23-058, ZEW - Leibniz Centre for European Economic Research.
    18. Pappa, Evi & Vassilatos, Vanghelis, 2007. "The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability," European Economic Review, Elsevier, vol. 51(6), pages 1492-1513, August.
    19. Alexandre B Cunha & Emanuel Ornelas, 2018. "The Limits of Political Compromise: Debt Ceilings and Political Turnover," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 781-824.
    20. Harald Badinger & Aurélien Fichet de Clairfontaine & Wolf Heinrich Reuter, 2017. "Fiscal Rules and Twin Deficits: The Link between Fiscal and External Balances," The World Economy, Wiley Blackwell, vol. 40(1), pages 21-35, January.
    21. Mr. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 2013/149, International Monetary Fund.
    22. Christine Olivia Strong, 2023. "The impact of fiscal rules on government debt: evidence from the CFA zone," Empirical Economics, Springer, vol. 65(5), pages 2357-2391, November.
    23. Reuter, Wolf Heinrich, 2015. "National numerical fiscal rules: Not complied with, but still effective?," European Journal of Political Economy, Elsevier, vol. 39(C), pages 67-81.
    24. Strong, Christine Olivia, 2024. "Selecting finance ministers: Key characteristics shaping government Debt in Africa," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 736-757.

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    More about this item

    Keywords

    Fiscal restrictions; Excessive debt; Business cycles; Us states;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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