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Working Paper Abstract

"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 macrovariables
and the probability of excessive debt for a sample of 48 US states. Fiscal constraints are
characterized with a number of indicators and volatility and correlations are computed in several
ways. The second moments of macroeconomic variables in states with different fiscal constraints
are economically and statistically similar. Excessive debt and the mechanism linking budget
deficit and excessive debts are independent of whether tight or loose fiscal constraints are in
place. Creative budget accounting may account for the results.

JEL classification numbers: E3, E5, H7

Keywords: Fiscal restrictions, Excessive Debt, Business cycles, US states

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Last updated February 27, 2007