IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Policy Responses to Fiscal Restraints: A Difference-in-Discontinuities Design

Listed author(s):
  • Veronica Grembi
  • Tommaso Nannicini
  • Ugo Troiano

We evaluate the effect of relaxing fiscal rules on policy outcomes applying a quasi-experimental research design. In 1999, the Italian central government introduced fiscal rules aimed at imposing fiscal discipline on municipal governments, and in 2001 the rules were relaxed for municipalities below 5,000 inhabitants. This institutional change allows us to implement a “difference-in-discontinuities” design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from a balanced budget to a deficit that amounts to 2 percent of the total budget. The deficit comes primarily from reduced revenues as unconstrained municipalities have lower real estate and income tax rates. Finally, we investigate the heterogeneity in policy responses across municipalities to provide new evidence about the costs and benefits of restricting fiscal policy. The impact is larger if the mayor can run for reelection, the number of political parties seated in the city council is higher, voters are older, the performance of the mayor in providing public good is lower, and cities are characterized by historical deficit, consistently with models on the political economy of fiscal adjustment.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-11/cesifo1_wp3999_1.pdf
Download Restriction: no

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3999.

as
in new window

Length:
Date of creation: 2012
Handle: RePEc:ces:ceswps:_3999
Contact details of provider: Postal:
Poschingerstrasse 5, 81679 Munich

Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
Email:


More information through EDIRC

References listed on IDEAS
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.:

as
in new window


  1. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  2. Gagliarducci, Stefano & Nannicini, Tommaso, 2009. "Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection," IZA Discussion Papers 4400, Institute for the Study of Labor (IZA).
  3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
  4. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  5. Lemieux, Thomas & Milligan, Kevin, 2008. "Incentive effects of social assistance: A regression discontinuity approach," Journal of Econometrics, Elsevier, vol. 142(2), pages 807-828, February.
  6. Eric Maskin, 2003. "The Politician and the Judge: Accountability in Government," Theory workshop papers 505798000000000076, UCLA Department of Economics.
  7. Battaglini, Marco & Coate, Stephen, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Working Papers 07-04, Cornell University, Center for Analytic Economics.
  8. Aghion, Philippe & Alesina, Alberto F & Trebbi, Francesco, 2002. "Endogenous Political Institutions," CEPR Discussion Papers 3473, C.E.P.R. Discussion Papers.
  9. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, September.
  10. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
  11. John A., List & Daniel, Sturm, 2006. "How Elections Matter: Theory and Evidence from Environmental Policy," Discussion Papers in Economics 768, University of Munich, Department of Economics.
  12. Andrea Ichino & Giovanni Maggi, 1999. "Work Environment and Individual Background: Explaining Regional Shirking Differentials in a Large Italian Firm," NBER Working Papers 7415, National Bureau of Economic Research, Inc.
  13. Wilbert van der Klaauw, 2008. "Regression-Discontinuity Analysis: A Survey of Recent Developments in Economics," LABOUR, CEIS, vol. 22(2), pages 219-245, 06.
  14. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  15. Signe Krogstrup & Sébastien Wälti, 2007. "Do fiscal rules cause budgetary outcomes?," Trinity Economics Papers tep0607, Trinity College Dublin, Department of Economics.
  16. Auerbach, Alan J., 2006. "Budget windows, sunsets, and fiscal control," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 87-100, January.
  17. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April.
  18. Alberto Alesina & Roberto Perotti, 1996. "Budget Deficits and Budget Institutions," IMF Working Papers 96/52, .
  19. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
  20. Alessandro Lizzeri, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 909-928.
  21. Tommaso Nannicini & Andrea Stella & Guido Tabellini & Ugo Troiano, 2013. "Social Capital and Political Accountability," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 222-250, May.
  22. Banks, Jeffrey S. & Sundaram, Rangarajan K., 1998. "Optimal Retention in Agency Problems," Journal of Economic Theory, Elsevier, vol. 82(2), pages 293-323, October.
  23. Torsten Persson & Guido Tabellini, 1999. "Political Economics and Public Finance," NBER Working Papers 7097, National Bureau of Economic Research, Inc.
  24. Clemens, Jeffrey & Miran, Stephen, 2010. "The effects of state budget cuts on employment and income," MPRA Paper 38715, University Library of Munich, Germany.
  25. Bordignon, Massimo & Nannicini, Tommaso & Tabellini, Guido, 2014. "Moderating Political Extremism: Single Round vs Runoff Elections under Plurality Rule," CEPR Discussion Papers 10323, C.E.P.R. Discussion Papers.
  26. Clemens, Jeffrey, 2013. "State Fiscal Adjustment During Times of Stress: Possible Causes of the Severity and Composition of Budget Cuts," MPRA Paper 55921, University Library of Munich, Germany.
  27. Casaburi, Lorenzo & Troiano, Ugo, 2013. "Ghost-House Busters: The Electoral Response to a Large Anti Tax Evasion Program," MPRA Paper 52242, University Library of Munich, Germany.
  28. Barry Eichengreen & Jurgen von Hagen, 1996. "Fiscal Policy and Monetary Union: Is There a Tradeoff between Federalism and Budgetary Restrictions?," NBER Working Papers 5517, National Bureau of Economic Research, Inc.
  29. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
  30. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
  31. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
  32. Besley, Timothy, 2007. "Principled Agents?: The Political Economy of Good Government," OUP Catalogue, Oxford University Press, number 9780199283910.
  33. Fischer, Stanley, 1983. "`Optimal fiscal and monetary policy in an economy without capital' by Robert E. Lucas and Nancy L. Stokey," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 95-99.
  34. Galasso, Vincenzo & Nannicini, Tommaso, 2009. "Competing on Good Politicians," CEPR Discussion Papers 7363, C.E.P.R. Discussion Papers.
  35. Fatás, Antonio & Mihov, Ilian, 2004. "The Macroeconomic Effects of Fiscal Rules in the US States," CEPR Discussion Papers 4372, C.E.P.R. Discussion Papers.
  36. von Hagen,Juergen, "undated". "A note on the empirical effectiveness of formal fiscal restraints," Discussion Paper Serie B 155, University of Bonn, Germany.
  37. Alberto Alesina & Ricardo Hausmann & Rudolf Hommes & Ernesto Stein, 1996. "Budget Institutions and Fiscal Performance in Latin America," NBER Working Papers 5586, National Bureau of Economic Research, Inc.
  38. Dickert-Conlin, Stacy & Elder, Todd, 2010. "Suburban legend: School cutoff dates and the timing of births," Economics of Education Review, Elsevier, vol. 29(5), pages 826-841, October.
  39. Marina, Azzimonti & Marco, Battaglini & Stephen, Coate, 2010. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," MPRA Paper 25935, University Library of Munich, Germany.
  40. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  41. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
  42. Mark Hallerberg & Jurgen von Hagen, 1997. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Working Papers 6341, National Bureau of Economic Research, Inc.
  43. Persson, Torsten & Svensson, Lars E. O., 1989. "Exchange rate variability and asset trade," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 485-509, May.
  44. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago.
  45. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 495-525 National Bureau of Economic Research, Inc.
  46. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
  47. Douglas Sutherland & Robert W. R. Price & Isabelle Joumard, 2005. "Fiscal Rules for Sub-central Governments: Design and Impact," OECD Economics Department Working Papers 465, OECD Publishing.
  48. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  49. Per Pettersson-Lidbom, 2004. "Does the Size of the Legislature Affect the Size of Government? Evidence from Two Natural Experiments," Discussion Papers 350, Government Institute for Economic Research Finland (VATT).
  50. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  51. Timothy Besley & Anne Case, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 769-798.
  52. Bandiera, Oriana & Prat, Andrea & Valletti, Tommaso, 2008. "Active and Passive Waste in Government Spending: Evidence from a Policy Experiment," CEPR Discussion Papers 6799, C.E.P.R. Discussion Papers.
  53. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
  54. Stephanie Riegg Cellini & Fernando Ferreira & Jesse Rothstein, 2010. "The Value of School Facility Investments: Evidence from a Dynamic Regression Discontinuity Design," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 215-261.
  55. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  56. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
  57. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
  58. Yianos Kontopoulos & Roberto Perotti, 1999. "Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 81-102 National Bureau of Economic Research, Inc.
  59. Knight, Brian G., 2000. "Supermajority voting requirements for tax increases: evidence from the states," Journal of Public Economics, Elsevier, vol. 76(1), pages 41-67, April.
  60. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-664, August.
  61. Timothy Besley & Torsten Persson & Daniel M. Sturm, 2010. "Political Competition, Policy and Growth: Theory and Evidence from the United States," CEP Discussion Papers dp1009, Centre for Economic Performance, LSE.
  62. Per Pettersson-Lidbom, 2001. "An Empirical Investigation of the Strategic Use of Debt," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 570-583, June.
  63. Gordon, Robert J., 1989. "Comments 'political and economic determinants of budget deficits in the industrial democracies' by N. Roubini and J.D. Sachs," European Economic Review, Elsevier, vol. 33(5), pages 934-938, May.
  64. James M. Poterba & Jürgen von Hagen, 1999. "Introduction to "Fiscal Institutions and Fiscal Performance"," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 1-12 National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3999. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.