Working Paper Abstract
295."The elusive costs and the immaterial gains of fiscal constraints"by Fabio Canova (IGIER, Universitat Pompeu Fabra, and CEPR) and Evi Pappa (London School of Economics, CEP and IGIER)
We study whether fiscal restrictions affect volatilities and correlations of macrovariablesand the probability of excessive debt for a sample of 48 US states. Fiscal constraints arecharacterized with a number of indicators and volatility and correlations are computed in severalways. The second moments of macroeconomic variables in states with different fiscal constraintsare economically and statistically similar. Excessive debt and the mechanism linking budgetdeficit and excessive debts are independent of whether tight or loose fiscal constraints are inplace. Creative budget accounting may account for the results.
JEL classification numbers: E3, E5, H7Keywords: Fiscal restrictions, Excessive Debt, Business cycles, US states
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