Working Paper: CEPR ID: DP4747
Authors: Fabio Canova; 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.
Keywords: budget restrictions; dynamic panels; fiscal policy; transmission; policy rules
JEL Codes: E30; E50; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal constraints (H60) | macroeconomic variables (E19) |
| fiscal constraints (H60) | output (C67) |
| fiscal constraints (H60) | employment (J68) |
| fiscal constraints (H60) | price levels (E30) |
| fiscal restrictions (E62) | transmission of fiscal disturbances to the real economy (F42) |
| state governments circumvent restrictions (H77) | minimal macroeconomic difference (E19) |
| tight fiscal constraints (H60) | good government performance (H11) |