Do Fiscal Rules Matter?

American Economic Journal: Applied Economics - 8 (2016), 1-30

joint with Veronica Grembi and Ugo Troiano

Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their e ectiveness 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 scal 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 scal rules increases de cit and lowers taxes. The e ect is larger if the mayor can be reelected, the number of parties is higher, and voters are older.