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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5406.

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Date of creation: Dec 2005
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Handle: RePEc:cpr:ceprdp:5406

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Keywords: business cycles; excessive debt; fiscal restrictions; US states;

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Citations

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Cited by:
  1. Buti, Marco & Martins, Joao Nogueira & Turrini, Alessandro Antonio, 2006. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CEPR Discussion Papers 5809, C.E.P.R. Discussion Papers.
  2. 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.
  3. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.
  4. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "The International Dimension of Productivity and Demand Shocks in the US Economy," CEPR Discussion Papers 7003, C.E.P.R. Discussion Papers.
  5. Evi Pappa, 2009. "The effects of fiscal expansions: an international comparison," Working Papers 409, Barcelona Graduate School of Economics.
  6. Roel Beetsma & Massimo Giuliodori, 2010. "The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 603-41, September.
  7. Evi Pappa, 2004. "The unbearable tightness of being in a monetary union : fiscal restrictions and regional stability," LSE Research Online Documents on Economics 510, London School of Economics and Political Science, LSE Library.
  8. repec:dgr:uvatin:2010021 is not listed on IDEAS
  9. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 645-673, 09.
  10. Marina Azzimonti, 2013. "The political economy of balanced budget amendments," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-20.

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