Paper #928

Title:

The elusive costs and the immaterial gains of fiscal contraints

Authors:

Fabio Canova and Evi Pappa

Date:

December 2005

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.

Keywords:

Business cycles, excessive debt, fiscal restrictions and US states

JEL codes:

E3, E5, H7

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Public Economics, 90 (8-9), pp. 1391-1414, 2006

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