Fiscal Rules to Tame the Political Budget Cycle : Evidence from Italian Municipalities

Author/Editor:

Lorenzo Forni ; Andrea Bonfatti

Publication Date:

January 20, 2017

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

The paper provides evidence that fiscal rules can limit the political budget cycle. It focuses on the application of the Italian fiscal rule at the sub-national level over the period 2004-2006 and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian subnational fiscal rule introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5,000 inhabitants. We find that the political budget cycle increases real capital spending by about 35 percent on average in the years prior to municipal elections and that the sub-national fiscal rule reduces these figures by about two thirds.

Series:

Working Paper No. 17/6

Subject:

English

Publication Date:

January 20, 2017

ISBN/ISSN:

9781475569971/1018-5941

Stock No:

WPIEA2017006

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

20

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