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The elusive costs and the immaterial gains of fiscal contraints

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  • Fabio Canova

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  • Evi Pappa

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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 928.

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Date of creation: Dec 2005
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Handle: RePEc:upf:upfgen:928

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Keywords: Business cycles; excessive debt; fiscal restrictions and US states;

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Cited by:
  1. 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.
  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. Marina Azzimonti, 2013. "The political economy of balanced budget amendments," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-20.
  4. Beetsma, Roel & Giuliodori, Massimo, 2009. "The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions: An Overview of Recent Research," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7500, C.E.P.R. Discussion Papers.
  5. Pappa, Evi & Vassilatos, Vanghelis, 2007. "The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability," European Economic Review, Elsevier, Elsevier, vol. 51(6), pages 1492-1513, August.
  6. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2009. "The international dimension of productivity and demand shocks in the U.S. economy," Working Paper Series, Federal Reserve Bank of San Francisco 2009-09, Federal Reserve Bank of San Francisco.
  7. Marco Buti & Jo�o Nogueira Martins & Alessandro Turrini, 2007. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CESifo Economic Studies, CESifo, CESifo, vol. 53(1), pages 115-152, March.
  8. Evi Pappa, 2009. "The effects of fiscal expansions: an international comparison," Working Papers 409, Barcelona Graduate School of Economics.
  9. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.
  10. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 25(4), pages 645-673, 09.

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