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

38 Pages Posted: 9 Dec 2016

See all articles by Ananya Kotia

Ananya Kotia

Independent

Victor Lledo

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

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.

Keywords: Fiscal rules, Europe, Fiscal policy, Intergovernmental fiscal relations, Fiscal balance, Econometric models, Fiscal policy, fiscal rules, fiscal discipline, intergovernmental relations, Europe

JEL Classification: E61, E62, H63, H77

Suggested Citation

Kotia, Ananya and Lledo, Victor, Do Subnational Fiscal Rules Foster Fiscal Discipline? New Empirical Evidence from Europe (April 2016). IMF Working Paper No. 16/84. Available at SSRN: https://ssrn.com/abstract=2882648

Ananya Kotia (Contact Author)

Independent ( email )

No Address Available

Victor Lledo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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