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Does it cost to be virtuous? The macroeconomic effects of fiscal constraints

Fabio Canova () and Evi Pappa ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study whether and how fiscal restrictions alter the business cycle features of 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; fiscal policy transmission; policy rules; dynamic panels. JEL classification codes : E3; E5; H7 (search for similar items in EconPapers)
JEL-codes: E3 E5 H7 (search for similar items in EconPapers)
Date: 2005-01
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http://eprints.lse.ac.uk/526/ Open access version. (application/pdf)

Related works:
Chapter: Does it Cost to be Virtuous? The Macroeconomic Effects of Fiscal Constraints (2006) Downloads
Working Paper: Does it Cost to be Virtuous? The Macroeconomic Effects of Fiscal Constraints (2005) Downloads
Working Paper: Does it Cost to be Virtuous? The Macroeconomic Effect of Fiscal Constraints (2004) Downloads
Working Paper: Does it cost to be virtuous? The macroeconomic effects of fiscal constraints (2004) Downloads
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