Balanced Budget Rules and Fiscal Outcomes: Evidence from Historical Constitutions

Zareh Asatryan, CCsar Castellln, Thomas Stratmann
2016 Social Science Research Network  
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more » ... von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. 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 affect tax revenues. Our analysis indicates 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. JEL codes: H50, H60, K10, N40 , and seminar participants at ZEW Mannheim, Clemson University, EPCS Freiburg for valuable comments. We would also like to thank Jessie Baugher and the Comparative Constitutions Project for collecting (and helping us use) the data on constitutions, and Stefan Voigt and Christian Bjørnskov for sharing the index of parliamentary legislative influence. Countries 132 132 132 132 132 132
doi:10.2139/ssrn.2777148 fatcat:pa7hqigiozhcvai2d27axh4ms4