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Vertical effects of fiscal rules: the Swiss experience

Heiko T. Burret and Lars Feld
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Heiko T. Burret: University of Freiburg

International Tax and Public Finance, 2018, vol. 25, issue 3, No 5, 673-721

Abstract: Abstract Formal fiscal rules have been introduced in many countries throughout the world. While most studies focus on the intra-jurisdictional effects of fiscal rules, vertical effects on the finances of other levels of government have yet to be explored thoroughly. From a theoretical point of view, vertical effects could work in opposite directions, i.e., improve and burden other levels’ finances. This paper is the first formally investigating the influence of Swiss debt brakes, which primarily target the cantonal level, on municipal finances. A difference-in-differences estimation (two-way fixed effects) of aggregated and disaggregated local panel data provides unique evidence that suggests little effect of budget constraints at the cantonal level on average municipal finances and fiscal decentralization. The results are confirmed by a wide range of robustness tests. If anything, cantonal debt brakes are associated with improved local finances and fiscal centralization. These findings run counter to popular fears and emphasize the possibility of positive spillover effects of fiscal rules.

Keywords: Fiscal rule; Vertical effect; Fiscal shock; Decentralization; Sub-national finances (search for similar items in EconPapers)
JEL-codes: H60 H77 H74 H72 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Vertical effects of fiscal rules: The Swiss experience (2016) Downloads
Working Paper: Vertical Effects of Fiscal Rules - The Swiss Experience (2014) Downloads
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DOI: 10.1007/s10797-017-9467-y

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