Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe
IMF Working Papers, April 7, 2016
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- Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe
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Bibliographic details
- Authors: Ananya Kotia, Victor Duarte Lledo
- Published: April 7, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484322031.001
Summary
- Authors: Ananya Kotia, Victor Duarte Lledo
- Date: April 7, 2016
- Paper type: IMF Working Paper No. 2016/084
- Core question: How do subnational fiscal rules interact with the intergovernmental fiscal framework to foster fiscal discipline among European subnational governments?
- Main approach summary: Use political variables describing the fiscal attitudes of the central government as instruments to obtain consistent estimates of the impact of subnational fiscal rules on fiscal balances.
Methods and data
- Identification strategy: Instrumental variables using political variables that describe the fiscal attitudes of the central government.
- Outcome variable: Fiscal balances of subnational governments.
- Paper length: 37 pages
- Series and identifiers:
- Volume: 2016
- Issue: 084
- DOI: https://doi.org/10.5089/9781484322031.001
- Stock No: WPIEA2016084
- ISBN: 9781484322031
- ISSN: 1018-5941
Key findings
- Discipline-enhancing effect of fiscal rules is weaker when there are large “vertical fiscal imbalances” (that is, large differences in revenue and spending assignments across the different levels of government).
- Instrumental-variable estimates suggest the central government’s fiscal-attitude political variables are useful instruments for isolating the causal impact of subnational fiscal rules on fiscal balances.
Policy implications and recommendations
- Reforms to reduce excessive vertical fiscal imbalances complement a rules-based fiscal framework aimed at fostering fiscal discipline.
- Implication for design: Strengthening subnational fiscal rules alone may be insufficient where large vertical fiscal imbalances persist; parallel reforms in intergovernmental revenue and spending assignments are recommended.
Subject classification and keywords
- Subject: Estimation techniques, Fiscal governance, Fiscal rules, Fiscal stance, Government asset and liability management
- Keywords: center, dummy variable, fiscal attitude, fiscal rule, WP
Source: IMF Working Paper "Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe" by Ananya Kotia and Victor Duarte Lledo, April 7, 2016.