Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-05T15:51:15.778Z Has data issue: false hasContentIssue false
  • English
  • Français

Law, Focal Points, and Fiscal Discipline in the United States and the European Union

Published online by Cambridge University Press:  08 May 2014

R. DANIEL KELEMEN  and
TERENCE K. TEO
R. DANIEL KELEMEN*
Affiliation:
Rutgers University
TERENCE K. TEO*
Affiliation:
Rutgers University
*
R. Daniel Kelemen is Professor of Political Science, Rutgers University ([email protected]).
Terence K. Teo is Ph.D. candidate, Department of Political Science, Rutgers University ([email protected]).
Get access Rights & Permissions [Opens in a new window]

Abstract

Many studies suggest that strict balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Why might public officials adhere to a rule that is practically never enforced in court? Existing literature points to a legal deterrence logic in which the threat of judicial enforcement deters sovereigns from violating the rules in the first place. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on U.S. states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

Type
Research Article
Information
American Political Science Review , Volume 108 , Issue 2 , May 2014 , pp. 355 - 370
Copyright
Copyright © American Political Science Association 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Advisory Commission on Intergovernmental Relations. 1987. Fiscal Discipline in the Federal System. Washington, DC: Advisory Commission on Intergovernmental Relations.Google Scholar
Alesina, Alberto, Hausmann, Ricardo, Hommes, Rudolf, and Stein, Ernesto. 1999. “Budget Institutions and Fiscal Performance in Latin America.” Journal of Development Economics 59 (2): 253–73.Google Scholar
Alt, James, Lassen, David Dreyer, and Rose, Shanna. 2006. “The Causes of Fiscal Transparency.” EPRU Working Paper Series 06-02, Economic Policy Research Unit.Google Scholar
Alt, James, Lassen, David D., and Wehner, Joachim. 2012. “Moral Hazard in an Economic Union.” Political Science and Political Economy Working Paper, No. 5/2012, London School of Economics.Google Scholar
Alt, James, and Lassen, David. 2006. “Fiscal Transparency, Political Parties, and Debt in OECD Countries.” European Economic Review 50 (6): 1403–39.Google Scholar
Anderson, Barry, and Minarik, Joseph. 2006. “Design Choices for Fiscal Policy Rules.” OECD Journal on Budgeting 5 (4): 159–208.Google Scholar
Bayoumi, Tamim, Goldstein, Morris, and Woglom, Geoffrey. 1995. “Do Credit Markets Discipline Sovereign Borrowers.” Journal of Money, Credit and Banking 27 (4): 1046–59.Google Scholar
Bernoth, Kerstin, and Wolff, Guntram. 2006. “Fool the Markets? Creating Accounting, Fiscal Transparency and Sovereign Risk Premia.” CESifo Working Paper No. 1732.Google Scholar
Bohn, Henning, and Inman, Robert P.. 1996. “Balanced Budget Rules and Public Deficits.” Carnegie-Rochester Conference Series on Public Policy 45: 13–76.Google Scholar
Bordo, Michael, Markiewicz, Agnieszka, and Jonung, Lars. 2011. “A Fiscal Union for the Euro.” NBER Working Paper 17380.Google Scholar
Briffault, Richard. 1996. Balancing Acts: The Reality Behind State Balanced Budget Requirements. New York: The Twentieth Century Fund Press.Google Scholar
Briffault, Richard. 2003. “The Disfavored Constitution.” Rutgers Law Journal 34: 907–57.Google Scholar
Briffault, Richard. 2008. “Courts, Constitutions, and Public Finance.” In Fiscal Challenges: An Interdisciplinary Approach to Budget Policy, eds. Garret, Elizabeth, Graddy, Elizabeth, and Jackson, Howell. New York: Cambridge University Press, 418–43.Google Scholar
Burger, Reiner. 2011. “Nachtragshaushalt von Rot-Grn verfassungswidrig.” Frankfurter Allgemeine Zeitung, March 15. Available at http://www.faz.net.Google Scholar
Caesar, Rolf. 2010. “Wirksame Grenzen für die Staatsverschuldung eine Illusion?” Jahrbuch für Wirtschaftswissenschaften 61 (1): 21–44.Google Scholar
Cameron, David. March 21, 2012. “Fiscal Pact Requires Reliance on a Statistic that cannot be Observed.” Financial Times p. 8.Google Scholar
Capeci, John. 1991. “Credit Risk, Credit Ratings, and Municipal Bond Yields.” National Tax Journal 44 (4): 41–56.Google Scholar
Carlsson, Hans, and van Damme, Eric. 1993. “Global Games and Equilibrium Selection.” Econometrica 61: 989–1018.Google Scholar
Claeys, Peter. 2008. “Rules and their Effects on Fiscal Policy in Sweden.” Swedish Economic Policy Review 15: 7–47.Google Scholar
Debrun, Xavier, Moulin, Laurent, Turrini, Alessandro, Ayuso-i-Casals, Joaquim, and Kumar, Manmohan. 2008. “Tied to the Mast? National Fiscal Rules in the European Union.” Economic Policy 23 (54): 297–362.Google Scholar
Deutsche, Bundesbank. 2006. “Zur Lage der Lnderfinanzen in Deutschland.” Monatsbericht (Juli 2006): 33–54.Google Scholar
Dewan, Torun, and Myatt, David P.. 2008. “The Qualities of Leadership.” American Political Science Review 102 (3): 351–68.Google Scholar
Dewan, Torun, and Myatt, David P.. 2012. “On the Rhetorical Strategies of Leaders.” Journal of Theoretical Politics 24 (4): 1–30.Google Scholar
Eichengreen, Barry. 1992. “Should the Maastrict Treaty be Saved?” In Princeton Studies in International Finance #74. Princeton, NJ: Princeton University.Google Scholar
Eichengreen, Barry, and Hagen, Jürgen von. 1996. “Federalism, Fiscal Restraints and European Monetary Union.” American Economic Review 86 (2): 134–8.Google Scholar
European Commission. 2011. EU Economic Governance “Six-Pack” enters into force. Press Release, MEMO/11/898, 12 December. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/898 Google Scholar
Feld, Lars P., Kalb, Alexander, Moessinger, Marc-Daniel, and Osterloh, Steffen. 2013. “Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses—The Swiss Experience.” Working Paper.Google Scholar
Frymer, Paul. 2003. “Acting When Elected Officials Won’t.” American Political Science Review 97 (3): 483–99.Google Scholar
Goldstein, Morris, and Woglom, Geoffrey. 1992. “Market-Based Fiscal Discipline in Monetary Unions.” In Establishing a Central Bank: Issues in Europe and Lessons from the United States, eds. Canzoneri, Matthew B., Grilli, Vittorio, and Masson, Paul. Cambridge, UK: Cambridge University Press.Google Scholar
Hadfield, Gillian K., and Weingast, Barry R.. 2011. “Endogenous Institutions: Law as a Coordinating Device.” Available at: http://works.bepress.com/ghadfield/46 Google Scholar
Hadfield, Gillian K., and Weingast, Barry R.. 2012. “What is Law? A Coordination Account of the Characteristics of Legal Order.” Harvard Journal of Legal Analysis 4 (2): 471–514.Google Scholar
Hadfield, Gillian K., and Weingast, Barry R.. 2013. “Law without the State: Legal Attributes and the Coordination of Decentralized Collective Punishment.” Journal of Law and Courts 1 (1): 3–34.Google Scholar
Hallerberg, Mark. 2010. “Fiscal Federalism Reforms in the European Union and the Greek Crisis.” European Union Politics 12 (1): 127–42.Google Scholar
Hallerberg, Mark, and Wolff, Guntram B.. 2006. “Fiscal Institutions, Fiscal Policy and Sovereign Risk Premia.” Deutsche Bundesbank Discussion Paper Series 1: Economic Studies, No. 35.Google Scholar
Heipertz, Martin, and Verdun, Amy. 2010. Ruling Europe. New York: Cambridge University Press.Google Scholar
Henning, C. Randall, and Kessler, Martin. 2012. “Fiscal Federalism: US History for Architects of Europe’s Fiscal Union.” Peterson Institute for International Economics, Working Paper WP 12-1.Google Scholar
Hou, Yilin, and Smith, Daniel L.. 2006. “A Framework for Understanding State Balanced Budget Requirement Systems.” Public Budgeting & Finance 26 (3): 22–45.Google Scholar
Hou, Yilin, and Smith, Daniel L.. 2010. “Do State Balanced Budget Requirements Matter?” Public Choice 145 (1-2): 57–79.Google Scholar
Iara, Anna, and Wolff, Guntram. 2010. “Rules and Risk in the Euro Area.” Economic Papers 433, December 2010. Brussels: European Commission.Google Scholar
Inman, Robert. 1998. “Do Balanced Budget Rules Work? US Experience and Possible Lessons for the EMU.” NBER Working Paper No. 5838.Google Scholar
Inman, Robert. 2003. “Transfers and Bailouts: Enforcing Local Fiscal Discipline with Lessons from U.S. Federalism.” In Fiscal Decentralization and the Challenge of Hard Budget Constraints, eds. Rodden, J., Eskeland, G., and Litvack, J.. Cambridge, MA: MIT Press, 35–84.Google Scholar
International Monetary Fund. 2009. Fiscal Rules—Anchoring Expectations for Sustainable Public Finances. Washington, DC: IMF.Google Scholar
International Monetary Fund. 2012. Fiscal Rules in Response to the Crisis—Toward the “Next-Generation” Rules. A New Dataset. IMF Working Paper WP/12/187. Washington, DC: IMF.Google Scholar
Johnson, Craig L., and Kriz, Kenneth. 2005. “Fiscal Institutions, Credit Ratings, and Borrowing Costs.” Public Budgeting and Finance 25 (1): 84–103.Google Scholar
Kitterer, Wolfgang, and Groneck, Max. 2006. Dauerhafte Verschuldungsregeln für die Bundesländer. Wirtschaftsdienst 86 (9): 559–63.Google Scholar
Kennedy, Suzanne, and Robbins, Janine. 2001. “The Role of Fiscal Rules in Determining Fiscal Performance.” Canadian Department of Finance Working Paper 2001–16.Google Scholar
Kiewiet, D. Roderick, and Szakaly, Kristin. 1996. “Constitutional Limitations on Borrowing.” Journal of Law, Economics, and Organization 12 (1): 62–97.Google Scholar
Liu, Lili, and Webb, Steven B.. 2011. “Laws for Fiscal Responsibility for Subnational Discipline.” Policy Research Working Paper 5587. The World Bank Poverty Reduction and Economic Management Network.Google Scholar
Lockyer, Bill. 2009. Status Report on California’s Bond Debt: Assembly Budget Hearing. December 14, 2009. Available at http://www.treasurer.ca.gov/debt.pdf.Google Scholar
Lovell, George. 2003. Legislative Deferrals. New York: Cambridge University Press.Google Scholar
Lowry, Robert C., and Alt, James E.. 2001. “A Visible Hand? Bond Markets, Political Parties, Balanced Budget Laws, and State Government Debt.” Economics and Politics 13 (1): 49–72.Google Scholar
Lutz, Byron F., and Folette, Glenn. 2012. “Fiscal Rules: What does the American Experience Tell Us?” Finance and Economics Discussion Series 2012–38. Board of Governors of the Federal Reserve System (U.S.).Google Scholar
McAdams, Richard H. 2000a. “A Focal Point Theory of Expressive Law.” Virginia Law Review 86: 1649–729.Google Scholar
McAdams, Richard H. 2000b. “An Attitudinal Theory of Expressive Law.” Oregon Law Review 79: 339–90.Google Scholar
McCubbins, Matthew. 1995. “Putting the State Back in State Government.” In Constitutional Reform in California, eds. Cain, B. and Noll, R.. Berkeley: Institute of Governmental Studies.Google Scholar
Morris, Stephen, and Shin, Hyun Song. 1998. “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks.” American Economic Review 88: 587–97.Google Scholar
Morris, Stephen, and Shin, Hyun Song. 2002. “Social Value of Public Information.” American Economic Review 92 (5): 1521–34.Google Scholar
Poterba, James M. 1994. “State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics.” Journal of Political Economy 102 (4): 799–821.Google Scholar
Poterba, James M., and Rueben, Kim S.. 1997. “State Fiscal Institutions and the U.S. Municipal Bond Market.” NBER Working Paper Series No. 6237, National Bureau of Economic Research.Google Scholar
Reinhart, Carmen, and Rogoff, Kenneth. 2009. This Time is Different. Princeton: Princeton University Press.Google Scholar
Rodden, Jonathan. 2002. “The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World.” American Journal of Political Science 46 (3): 670–87.Google Scholar
Rodden, Jonathan. 2006. Hamilton’s Paradox. New York: Cambridge University Press.Google Scholar
Unicredit. 2012. Handbook of German States—The True Safe Haven. Munich, Germany: Unicredit Research. Available at www.research.unicreditgroup.eu Google Scholar
von Hagen, Jürgen. 1991. “A Note on the Empirical Effectiveness of Formal Fiscal Restraints.” Journal of Public Economics 44 (2): 199–210.Google Scholar
Wallis, John, Sylla, Richard, and Grinath III, Arthur. 2004. “Sovereign Debt and Repudiation.” NBER Working Paper 10753. Available at www.nber.org/papers/w10753 Google Scholar
Wallis, John, and Weingast, Barry R.. 2008. Dysfunctional or Optimal Institutions. In Fiscal Challenges, eds. Garret, Grady, and Jackson. Cambridge University Press, 331–63.Google Scholar
Waterfield, Bruno. 2012. “Setback for Merkel as Austerity Agenda Rejected in Germanys Biggest State.” The Telegraph, May 13. Available at http://www.telegraph.co.uk Google Scholar
Whittington, Keith. 2005. “Interpose Your Friendly Hand.” American Political Science Review 99 (40): 583–96.Google Scholar
Wibbels, Erik. 2000. “Federalism and the Politics of Macroeconomic Policy and Performance.” American Journal of Political Science 44 (4): 687–702.Google Scholar
Wise, Peter. 2013. “Portugal Court Rules Against Austerity.” Financial Times, April 5. Available at: http://www.ft.com/ Google Scholar
Yoo, John, and Gaziano, Todd. 2011. “Just Say No to Judicial Enforcement of a Balanced-Budget Amendment.” National Review Online, March 9. Available at: http://www.aei.org.Google Scholar
Submit a response

Comments

No Comments have been published for this article.