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Does it Cost to be Virtuous? The Macroeconomic Effects of Fiscal Constraints

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  • Fabio Canova
  • Evi Pappa

Abstract

We study whether and how fiscal restrictions alter the business cycle features of 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11065.

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Date of creation: Jan 2005
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Publication status: published as Canova, Fabio and Evi Pappa. "The Elusive Costs And The Immaterial Gains Of Fiscal Constraints," Journal of Public Economics, 2006, v90(8-9,Sep), 1391-1414.
Handle: RePEc:nbr:nberwo:11065

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Cited by:
  1. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is it is or is it ain't my obligation? Regional debt in a fiscal federation," Working Papers, Federal Reserve Bank of Dallas 0507, Federal Reserve Bank of Dallas.
  2. Afonso, António & Furceri, Davide, 2010. "Government size, composition, volatility and economic growth," European Journal of Political Economy, Elsevier, Elsevier, vol. 26(4), pages 517-532, December.
  3. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2010. "Cross-Border Spillovers from Fiscal Stimulus," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 5-37, March.
  4. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5866, C.E.P.R. Discussion Papers.
  5. Javier Andrés & Rafael Doménech, 2006. "Fiscal Rules and Macroeconomic Stability," Hacienda Pública Española, IEF, IEF, vol. 176(1), pages 9-41, April.
  6. Krogstrup, Signe & Wyplosz, Charles, 2010. "A common pool theory of supranational deficit ceilings," European Economic Review, Elsevier, Elsevier, vol. 54(2), pages 269-278, February.
  7. Mackiewicz, Michał, 2005. "Making The Stability Pact More Flexible: Can It Lead to Procyclical Fiscal Policies?," MPRA Paper 16033, University Library of Munich, Germany.

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