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The elusive costs and the immaterial gains of fiscal constraints

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  • Fabio Canova
  • Evi Pappa

Abstract

We study whether fiscal restrictions affect volatilities and correlations of macrovariables and the probability of excessive debt for a sample of 48 US states. Fiscal constraints are characterized with a number of indicators and volatility and correlations are computed in several ways. The second moments of macroeconomic variables in states with different fiscal constraints are economically and statistically similar. Excessive debt and the mechanism linking budget deficit and excessive debts are independent of whether tight or loose fiscal constraints are in place. Creative budget accounting may account for the results.

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File URL: http://eprints.lse.ac.uk/518/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 518.

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Length: 30 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:ehl:lserod:518

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Web page: http://www.lse.ac.uk/
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Keywords: Fiscal restrictions; excessive debt; business cycles; US states. JEL classification codes : E3; E5; H7;

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Citations

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Cited by:
  1. Evi Pappa, 2005. "The Unbearable Tightness of Being in a Monetary Union: Fiscal Restrictions and Regional Stability"," Working Papers 294, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  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. 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.
  4. 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.
  5. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.
  6. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 645-673, 09.
  7. 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.
  8. Marina Azzimonti, 2013. "The political economy of balanced budget amendments," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-20.
  9. Evi Pappa, 2009. "The effects of fiscal expansions: an international comparison," Working Papers 409, Barcelona Graduate School of Economics.
  10. 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.

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