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Does it Cost to be Virtuous? The Macroeconomic Effect 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4747.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4747

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Keywords: budget restrictions; dynamic panels; fiscal policy transmission; policy rules;

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Cited by:
  1. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Cross-border spillovers from fiscal stimulus," CEPR Discussion Papers 7535, C.E.P.R. Discussion Papers.
  2. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005.
  3. António Afonso & Davide Furceri, 2008. "Government Size, Composition, Volatility and Economic Growth," Working Papers Department of Economics 2008/04, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Mackiewicz, Michał, 2005. "Making The Stability Pact More Flexible: Can It Lead to Procyclical Fiscal Policies?," MPRA Paper 16033, University Library of Munich, Germany.
  5. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," NBER Working Papers 11655, National Bureau of Economic Research, Inc.
  6. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers 5866, C.E.P.R. Discussion Papers.
  7. Krogstrup, Signe & Wyplosz, Charles, 2010. "A common pool theory of supranational deficit ceilings," European Economic Review, Elsevier, vol. 54(2), pages 269-278, February.

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