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Do fiscal constraints prevent default? Historical evidence from U.S. municipalities

John Dove ()

Economics of Governance, 2016, vol. 17, issue 2, 185-209

Abstract: Abstract Through the nineteenth century numerous U.S. states developed extensive municipal fiscal constitutions. These generally came in the wake of financial crises and large-scale default of public debts. Although the constraints were imposed in order to minimize the likelihood that such outcomes would occur in the future, little work has been undertaken to analyze whether they were successful in achieving that goal. Therefore, this current study attempts to do so by empirically investigating how procedural safeguards and outright prohibitions on debt accumulation, along with hard budget constraints, and tax limits impacted the likelihood of default. This is done by evaluating municipal defaults that centered on the Panic of 1893. Overall, the results suggest that outright prohibitions on debt accumulation and hard budget constraints actually reduced the likelihood of municipal default across states, while tax limits and procedural safeguards increased that likelihood.

Keywords: Default; Sovereign debt; Fiscal constraints; Panic of 1893; Credible commitments (search for similar items in EconPapers)
JEL-codes: D78 H73 H74 N21 N41 (search for similar items in EconPapers)
Date: 2016
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