SFB 303 Discussion Paper No. B-155

Author: Hagen, Jürgen von
Title: A Note on the Empirical Effectiveness of Formal Fiscal Restraints
Abstract: An important argument in the current debate over European monetary integration is that a monetary union requires formal fiscal restraints limiting individual member states' budgetary powers to reduce the common monetary authority's risk of having to bail out insolvent member governments. This note presents empirical evidence on the effectiveness of fiscal restraints on state budgets in the US. Nonparametric tests reveal that fiscal restraints significantly affect the probability of fiscal choices and performance, without however preventing extreme outcomes. Fiscal restraints induce substitution of non-restricted for restricted debt instruments.
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Creation-Date: June 1990
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