Do Fiscal Rules Matter?

Author:

Grembi Veronica1,Nannicini Tommaso2,Troiano Ugo3

Affiliation:

1. Copenhagen Business School, Solbjerb Plads 3, 2000 Frederiksberg, Denmark (e-mail: )

2. Economics Department, Bocconi University, Via Roentgen, 20136 Milan, Italy, IGIER, CEPR, and IZA (e-mail: )

3. Department of Economics, University of Michigan, 611 Tappan Avenue, 219 Lorch Hall, Ann Arbor, MI 48109 and NBER (e-mail: )

Abstract

Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999, the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficits and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older. (JEL E62, H71, H72, H74, R51)

Publisher

American Economic Association

Subject

General Economics, Econometrics and Finance

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