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

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Fabio Canova
Evi Pappa

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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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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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Handle: RePEc:nbr:nberwo:11065

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Find related papers by 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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. P R Agénor & D Yilmaz, 2006. "The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 73, Economics, The Univeristy of Manchester. [Downloadable!]
  2. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers 5866, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. 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 05-07, Federal Reserve Bank of Dallas. [Downloadable!]
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  4. António Afonso & Davide Furceri, 2008. "Government size, composition, volatility and economic growth," Working Paper Series 849, European Central Bank. [Downloadable!]
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  5. Javier Andrés & Rafael Doménech, 2006. "Fiscal Rules and Macroeconomic Stability," Hacienda Pública Española, IEF, vol. 176(1), pages 9-41, April. [Downloadable!]
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