Fiscal Rules: Historical, Modern, and Sub-National Growth Effects

84 Pages Posted: 16 Jun 2020

See all articles by Klaus Gründler

Klaus Gründler

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Niklas Potrafke

CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2020

Abstract

We examine how fiscal rules influence economic growth. The results show that constitutional fiscal rules promoted growth from the Industrial Revolution until World War II (1789-1950) and also increased modern economic growth (1985-2015). To address selection on unobservables, we conduct a large-scale international survey among 1,224 economic experts in 109 countries. We exploit cross-country differences in expert preferences as an instrumental variable for the adoption of constitutional fiscal rules. The results show that the cumulative long-run effect of permanently adopting constitutional fiscal rules on real per capita GDP is 18%. As a complementary strategy to tackle unobservables, we examine sub-national fiscal rules, employing a newly collected dataset of 206 regional governments from 10 federal states (1992-2012). The results show that fiscal rules also increased economic growth at the sub-national level.

Keywords: fiscal rules, economic growth, constitutions, historical public finance

JEL Classification: O110, O120, D740

Suggested Citation

Gründler, Klaus and Potrafke, Niklas, Fiscal Rules: Historical, Modern, and Sub-National Growth Effects (May 2020). CESifo Working Paper No. 8305, Available at SSRN: https://ssrn.com/abstract=3604845

Klaus Gründler (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Niklas Potrafke

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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