Micro and Macro essays in Applied Fiscal Policy

This thesis analysis micro and macro aspect of applied fiscal policy issues. The first chapter investigates the extent to which local budget spending composition reacts to fiscal rules variations. I consider the budget of Italian municipalities and exploit specific changes in the Domestic Stability Pact’s rules, to perform a difference-in-discontinuities analysis. The results show that imposing a cap on the total amount of consumption and investment is not as binding as two caps, one for consumption and a different one for investment. More specifically, consumption is triggered by changes in wages and services spending, while investment relies on infrastructure movements. In addition, there is evidence that when an increase in investment is achieved, there is also a higher budget deficit level. The second chapter intends to analyze the extent to which fiscal policy shocks are able to affect macrovariables during business cycle fluctuations, differentiating among three intervention channels: public taxation, consumption and investment. The econometric methodology implemented is a Panel Vector Autoregressive model with a structural characterization. The results show that fiscal shocks have different multipliers in relation to expansion or contraction periods: output does not react during good times while there are significant effects in bad ones. The third chapter evaluates the effects of fiscal policy announcements by the Italian government on the long-term sovereign bond spread of Italy relative to Germany. After collecting data on relevant fiscal policy announcements, we perform an econometric comparative analysis between the three cabinets that followed one another during the period 2009-2013. The results suggest that only fiscal policy announcements made by members of Monti’s cabinet have been effective in influencing significantly the Italian spread in the expected direction, revealing a remarkable credibility gap between Berlusconi’s and Letta’s governments with respect to Monti’s administration.

Fiscal Constitutions: An Empirical Approach

The overarching question of this dissertation is: “why does the public debt grow, and why are fiscal (debt) crises repetitive and so widespread?” A special focus in answering this question is given to a fiscal constitution, which contains a country-specific set of laws, rules and regulations, and guides decision making in the area of fiscal policy. By shaping incentives and limiting arbitrariness, the fiscal constitution determines the course of fiscal policy and fiscal outcomes in the long term. This dissertation does not give, however, an exhaustive response to the overarching question. Instead it asks much narrower questions, which are selected after reviewing and identifying the main weaknesses and gaps in the modern literature on fiscal constitutions.

What Ended the Great Depression? Re-Evaluating the Role of Fiscal Policy

Conventional wisdom contends that fiscal policy was of secondary importance for the economic recovery in the 1930s. The recovery is then connected to monetary policy that allowed non-sterilised gold inflows to increase the money supply. Often this is shown by measuring the fiscal multipliers and demonstrating that they were relatively small. This paper shows that problems with the conventional measures of fiscal multipliers in the 1930s may have created an incorrect consensus on the irrelevance of fiscal policy. The rehabilitation of fiscal policy is seen as a necessary step in the reinterpretation of the positive role of New Deal policies for the recovery.

Choosing the Path of Austerity: How Policy Coalitions Shape Welfare-policy Choices in Periods of Fiscal Consolidation

In general, fiscal adjustments are associated with significant reductions in social spending. Hence, the welfare state is not spared from austerity. Because the welfare state is still central to party competition, this is electorally risky. The paper addresses the following questions: Do left parties differ from their centrist and rightist competitors in the design of austerity measures? And does government type has an impact on the extent to which austerity policies rely on social spending cuts? By comparing 17 OECD countries between 1982 and 2009 we show that if governments embark on a path to austerity, their ideology does not have a significant effect on the magnitude of welfare state retrenchment. However, if major opposition parties and interest groups rally against social spending cuts, a broad pro-reform coalition is a crucial precondition for large fiscal consolidation programs to rely on substantial cuts to social security.