Balanced Budget Rules and Fiscal Outcomes: Evidence from Historical Constitutions

44 Pages Posted: 9 May 2016

See all articles by Zareh Asatryan

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research

César Castellón

Clemson University

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; George Mason University - Mercatus Center; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: May 8, 2016

Abstract

This paper studies the long-run fiscal consequences of balanced budget rules (BBR) that are enshrined in a country’s constitution. Using historical data dating back to the 19th century and applying a difference-in-difference approach we find that the introduction of a constitutional-BBR reduces government debt-to-GDP and expenditure-to-GDP ratios, on average, by around 11 and 3 percentage points, respectively. We do not find evidence that BBRs also affect tax revenues. Our analysis demonstrates that such rules reduce the probability of experiencing a debt crisis, and that the effective enforcement of BBRs can be conditional on the quality of democratic institutions. In addition, we implement an instrumental variable approach by instrumenting the probability of having budget rules on de jure constraints on changing the constitution. This and other tests suggest that the relations we find are largely causal going from BBRs to fiscal outcomes.

Keywords: Economic effects of constitutions, fiscal rules, historical public finances, sovereign debt crises

JEL Classification: H50, H60, K10, N40

Suggested Citation

Asatryan, Zareh and Castellón, César and Stratmann, Thomas, Balanced Budget Rules and Fiscal Outcomes: Evidence from Historical Constitutions (May 8, 2016). GMU Working Paper in Economics No. 16-16, Available at SSRN: https://ssrn.com/abstract=2777148 or http://dx.doi.org/10.2139/ssrn.2777148

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

César Castellón

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Thomas Stratmann (Contact Author)

George Mason University - Buchanan Center Political Economy ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://www.mercatus.org/scholars/thomas-stratmann

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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