Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe

April 7, 2016

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Format: Chicago

Ananya Kotia, and Victor Duarte Lledo. Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe, (USA: International Monetary Fund, 2016) accessed June 16, 2025

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies how fiscal rules interact with the intergovernmental fiscal framework to foster fiscal discipline among European subnational governments. We 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. The results suggest that the 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. These findings imply that separate reforms to reduce excessive vertical fiscal imbalances complement a rules-based fiscal framework that is aimed at fostering fiscal discipline.

Subject: Estimation techniques, Fiscal governance, Fiscal rules, Fiscal stance, Government asset and liability management

Keywords: Center, Dummy variable, Fiscal attitude, Fiscal rule, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/084
Stock No:

WPIEA2016084
ISBN:

9781484322031
ISSN:

1018-5941

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