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International Tax and Public Finance

, Volume 25, Issue 3, pp 673–721 | Cite as

Vertical effects of fiscal rules: the Swiss experience

  • Heiko T. Burret
  • Lars P. Feld
Article

Abstract

Formal fiscal rules have been introduced in many countries throughout the world. While most studies focus on the intra-jurisdictional effects of fiscal rules, vertical effects on the finances of other levels of government have yet to be explored thoroughly. From a theoretical point of view, vertical effects could work in opposite directions, i.e., improve and burden other levels’ finances. This paper is the first formally investigating the influence of Swiss debt brakes, which primarily target the cantonal level, on municipal finances. A difference-in-differences estimation (two-way fixed effects) of aggregated and disaggregated local panel data provides unique evidence that suggests little effect of budget constraints at the cantonal level on average municipal finances and fiscal decentralization. The results are confirmed by a wide range of robustness tests. If anything, cantonal debt brakes are associated with improved local finances and fiscal centralization. These findings run counter to popular fears and emphasize the possibility of positive spillover effects of fiscal rules.

Keywords

Fiscal rule Vertical effect Fiscal shock Decentralization Sub-national finances 

JEL Classification

H60 H77 H74 H72 

Notes

Acknowledgements

We would like to thank Gerrit Gonschorek, Emma Karslake and Leonardo Palhuca for their valuable research assistance and Christoph Schaltegger for providing us with cantonal data on realized and forecasted revenue and expenditure. We are grateful to Martina Neuhaus from the Swiss Federal Department of Finance for providing us with the best data available on local finances.

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Authors and Affiliations

  1. 1.Walter Eucken InstituteUniversity of FreiburgFreiburgGermany

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