Do Fiscal Rules Matter?
55 Pages Posted: 27 May 2011 Last revised: 10 Oct 2015
Date Written: October 2015
Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999 the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficit and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older.
Keywords: fiscal rules, fiscal federalism, treatment evaluation
JEL Classification: C21, C23, D78, H72, H77
Suggested Citation: Suggested Citation