The global financial crisis exposed the sovereign-bank nexus as a driver of financial instability and an impediment to economic growth. Little attention has been paid to the interaction of banking regulation and public finance. This study analyzes the interaction between the prudential regulation of banks’ capital requirements and constitutional fiscal rules. We hypothesise that a conflict occurs between the regulatory privileged treatment of sovereign bonds held by banks and the market exposure logic enshrined in constitutional fiscal rules. This is particularly problematic in currency unions such as the US and the euro area. Our legal analysis builds on an empirical econometric assessment showing that peripheral euro area governments increase their debt following a tightening in macroprudential capital regulation, laying bare the undesired interaction between banking regulation and constitutional rules.

Following failure of the stimulatory policies post the 2008 financial crisis and the resulting instability of the Euro, national fiscal consolidation with real sanctions for non-compliance has become a key focus of most governments as they address escalating budget deficits and rapidly rising public debt. The problem is that agreement by central governments to adopt national fiscal rules, whether self-imposed or imposed by some supranational institution, leaves unaddressed how such rules and sanctions should be adopted by (or imposed on) sub-central and local governments. To date, the primary focus has been on whether the encouragement given over recent decades to fiscal decentralisation has worsened public debt levels and made national fiscal consolidation by central governments more difficult. This article argues that what is missing from this discussion is attention to the intergovernmental institutional arrangements and how they and their reform are potentially crucial to both national fiscal consolidation and ensuring retention of the benefits of fiscal decentralisation.

The “democratic advantage” in access to credit markets has been vigorously researched. Recent research has found that this “autocratic disadvantage” can be partly countered by other factors. However, this research agenda has largely ignored an increasingly important type of institution of direct importance for national fiscal policy, fiscal rules. This article argues that fiscal rules alleviate the “autocratic disadvantage” in sovereign bond market access. This argument is tested on a dataset on fiscal rules and sovereign bond issuing data covering 121 countries from 1990 to 2015. The results provide substantial evidence in favor of the argument, autocracies with fiscal rules face no disadvantage in bond market access and might even be more likely to issue new government bonds than democracies.

A growing literature has argued that electoral turnout decreases the more government policy constrained by economic and institutional factors. This paper investigates whether a certain type of policy constraint, fiscal rules, lowers turnout. Since fiscal rules set limits for government fiscal policy, they should lower the incentive for citizens to participate electorally. However, using parliamentary turnout data in a large panel of democratic countries, little robust evidence is found in favor of fiscal rules having a depressing effect on electoral turnout. Analysis of European individual-level data also suggests that national fiscal rules do not affect inequality in electoral turnout between income groups either. Difference-in-discontinuity evidence from Italian municipalities further suggests that the results are causally identified.

This paper shows how fiscal policy affects unemployment in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated using US data that includes labor market flows and distinct fiscal instruments. Several findings stand out. First, unemployment multipliers for spending and consumption tax cuts are substantial, even though output multipliers turn out to be less than one. Second, multipliers for labor tax cuts are small. Third, fiscal rules enhance the positive effects of discretionary fiscal policy. However, these expansionary effects on the multipliers are modest compared to earlier studies.

EU Member States, particularly in the Euro Area, have been pushed to adopt more extensive and intrusive fiscal rules, but what is the evidence that the rules are succeeding? The EU level Stability and Growth Pact (SGP) has been – and remains – the most visible rule-book, but it has been complemented by a profusion of national rules and by new provisions on other sources of macroeconomic imbalance. Much of the analysis of rules has concentrated on their technical merits, but tends to neglect the political economy of compliance. This paper examines the latter, looking at compliance with fiscal rules at EU and Member State levels and at the rules-based mechanisms for curbing other macroeconomic imbalances. It concludes that politically driven implementation and enforcement shortcomings have been given too little attention, putting at risk the integrity and effectiveness of the rules.

This paper analyzes the dynamics of public debt in a simple two-period overlapping-generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge are characterized. The analysis is then extended to consider the case of partial depreciation, an endogenous risk premium, an endogenous primary surplus rule, a generalized golden rule, a nonseparable utility function, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving, even in a context of fiscal retrenchment, the allocation of resources to specific types of public investment.

The European sovereign debt crisis has revived the debate about appropriate fiscal rules in the European Economic and Monetary Union. Whereas the Stability and Growth Pact and the Fiscal Compact make no distinction between public consumption and investment expenditure, the aim of the current paper is to analyze the implications of the adoption of the Golden rule in a monetary union, distinguishing between the two types of public expenditure. With the help of a macroeconomic model, we show that introducing a Golden rule and smoothing public investment expenditure would be welfare-improving, and mostly for countries where taxation rates and the productivity of public investment are highest, and for the most closed countries. It would also be the most beneficial for countries where the monetary transmission parameter, the propensity to consume, and the price elasticity of supply are weakest, whereas supply-side distortions are the strongest.

This paper develops an overlapping-generations model to study the growth-maximizing level of public debt under conditions of demograhic change. It is shown that the optimal debt level depends on a positive marginal productivity of public capital. In general, it also depends on the demographic parameters, but not if the government is not allowed to borrow to cover revenue shortfalls for current age-related spending. In that context, balanced budget rules are not an approriate form of fiscal rule. The implication is that a government facing demograhic change or demands for more welfare spending will have to adjust its fiscal plans to accommodate those changes, most likely downward, if growth is to be preserved. An advantage of this model is that it allows us to determine in advance the way in which fiscal policies need to adjust as demographic parameters change.

This paper examines the outcomes for changes introduced by the UK Coalition government in 2010. The Office for Budget Responsibility (OBR) is generally regarded as a success, and should become a permanent part of fiscal policymaking. The form of the primary fiscal mandate, involving a five-year rolling target, appears to be a sensible way to shape fiscal decisions when monetary policy is able to stabilise the economy. Unfortunately it was introduced, along with a five-year programme of severe fiscal consolidation (austerity), while the economy was in a liquidity trap. The OBR estimates austerity reduced GDP growth by 1 per cent in both 2010–11 and 2011–12, and monetary policy was unable to offset this. For the Liberal Democrats a misreading of the Eurozone crisis may have been responsible for this mistake, but for the Conservatives this mistake appears to derive from an unconventional view that the liquidity trap is unimportant.

Restoring sustainable public finances in the aftermath of the Great Recession is a key challenge in most EU countries. In order to learn from history, our paper examines consolidation episodes in the EU since 1970. We shed light on the factors that favour the start of a consolidation episode and determine its success. Compared to the existing literature, we add a number of new dimensions in the analysis. First, we explore a broader set of potential ingredients of the ‘recipe for success‘, including the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, we check whether the ‘recipe for success’ changed over time. Our analysis broadly confirms received wisdom concerning the conditions triggering a consolidation episode and the role of the composition of adjustment for success, with some qualifications related to the role played by government wages. In addition it provides evidence that well-designed fiscal governance as well as structural reforms improve the odds of both starting a consolidation episode and achieving a lasting fiscal correction. We also show that, over time, successful and unsuccessful consolidation episodes have become more similar in terms of adjustment composition.

This paper considers the effects of fiscal governance in Central and East European countries 1998–2008. The first part makes predictions about which form of fiscal governance fits which form of government. Under multi-party coalition governments, fiscal contracts where governments make political commitments to multi-annual fiscal plans work well. In countries where two political blocks face off against one another, delegation based around a strong finance ministry should be most effective. The second part examines electoral and party systems, which affect the form of government in place. The third part documents norms, rules, and institutions in place. The final section considers the joint effects of fiscal governance on fiscal outcomes. On balance, the underlying political climate is crucial for determining what types of fiscal norms, institutions, and rules function best. The more countries diverge from their expected form of fiscal governance, the greater the increase in a country's debt burden.