Fiscal Rules to Tame the Political Budget Cycle Evidence from Italian Municipalities

The paper provides evidence that fiscal rules can limit the political budget cycle. It focuses on the application of the Italian fiscal rule at the sub-national level over the period 2004-2006 and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italia...

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Bibliographic Details
Main Author: Forni, Lorenzo
Other Authors: Bonfatti, Andrea
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2017
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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651 4 |a Italy 
653 |a Capital investments 
653 |a Economics of the Handicapped 
653 |a State and Local Budget and Expenditures 
653 |a Budget Systems 
653 |a Public finance & taxation 
653 |a Federalism 
653 |a National Deficit Surplus 
653 |a Fiscal Policy 
653 |a Other Public Investment and Capital Stock 
653 |a Aging 
653 |a Economics of the Elderly 
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653 |a Population & demography 
653 |a Single Equation Models 
653 |a National Government Expenditures and Related Policies: Infrastructures 
653 |a Treatment Effect Models 
653 |a Secession 
653 |a Demographic Economics: General 
653 |a Non-labor Market Discrimination 
653 |a Fiscal rules 
653 |a Budget planning and preparation 
653 |a Fiscal policy 
653 |a Population aging 
653 |a Expenditure 
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520 |a The paper provides evidence that fiscal rules can limit the political budget cycle. It focuses on the application of the Italian fiscal rule at the sub-national level over the period 2004-2006 and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian subnational fiscal rule introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5,000 inhabitants. We find that the political budget cycle increases real capital spending by about 35 percent on average in the years prior to municipal elections and that the sub-national fiscal rule reduces these figures by about two thirds