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State Public Debt Laws and Fiscal Performance

César Velázquez G.

Working Papers from Universidad Iberoamericana, Department of Economics

Abstract: Institutions play a fundamental role on the fiscal performance of governments. In the literature of federalism, fiscal institutions are one possible way to control subnational debt that may cause problems in the financial sector and affect a country's macroeconomic stability. This is particular relevant in developing countries where problems of soft-budget constraints at the regional and local level are more common and reliance on market discipline is harder. This paper studies the impact of state public debt laws on state fiscal performance in the case of Mexico. Using data from a panel of the 31 Mexican states for the period 1993-2002 the analysis finds that there is a positive impact of the existence of debt laws, but once we take care of potential problems of endogeneity, the effect disappears.

Date: 2006
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