Law, Focal Points and Fiscal Discipline in the United States and the European Union

American Political Science Review, Forthcoming

43 Pages Posted: 15 Dec 2013

See all articles by R. Daniel Kelemen

R. Daniel Kelemen

Rutgers, The State University of New Jersey - New Brunswick/Piscataway; Rutgers, The State University of New Jersey - Rutgers Law School; University of Pennsylvania Carey Law School - Student/Alumni/Adjunct

Terence Teo

Rutgers, The State University of New Jersey - Department of Political Science

Date Written: December 13, 2013

Abstract

Many studies suggest that strict balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Why might public officials adhere to a rule that is practically never enforced in court? Existing literature points to a legal deterrence logic in which the threat of judicial enforcement deters sovereigns from violating the rules in the first place. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on US states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

Keywords: Eurozone crisis, Balanced Budget Rules, US States, Fiscal Discipline, Focal Points, Law

JEL Classification: H7

Suggested Citation

Kelemen, R. D. and Teo, Terence, Law, Focal Points and Fiscal Discipline in the United States and the European Union (December 13, 2013). American Political Science Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2367557

R. D. Kelemen (Contact Author)

Rutgers, The State University of New Jersey - New Brunswick/Piscataway ( email )

89 George St.
New Brunswick, NJ 08901
United States

Rutgers, The State University of New Jersey - Rutgers Law School ( email )

Newark, NJ
United States

University of Pennsylvania Carey Law School - Student/Alumni/Adjunct ( email )

Philadelphia, PA
United States

Terence Teo

Rutgers, The State University of New Jersey - Department of Political Science ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

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