Balanced budget rules and fiscal outcomes: Evidence from historical constitutions

Zareh Asatryan, Cesar Castellón and Thomas Stratmann

No 16-034, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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.

Keywords: economic effects of constitutions; fiscal rules; historical public finances; sovereign debt crises (search for similar items in EconPapers)
JEL-codes: H60 K10 N40 (search for similar items in EconPapers)
Date: 2017, Revised 2017
New Economics Papers: this item is included in nep-his, nep-law, nep-pbe and nep-pke
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https://www.econstor.eu/bitstream/10419/173093/1/1011067323.pdf (application/pdf)

Related works:
Journal Article: Balanced budget rules and fiscal outcomes: Evidence from historical constitutions (2018)
Working Paper: Balanced Budget Rules and Fiscal Outcomes: Evidence from Historical Constitutions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:16034

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