GUI2DE Seminar: Luis Martinez
Luis Martinez
University of Chicago
“Economic and Political Effects of Fiscal Rules: Evidence from a Natural Experiment in Colombia”
ABSTRACT
Fiscal rules are a promising policy tool to address fiscal indiscipline, but their effectiveness and political feasibility remain unclear, particularly in weakly institutionalized settings. To answer this question, we leverage exogenous variation across Colombian municipalities in exposure to a subnational fiscal rule that set a cap on operating expenses as a share of current revenues. We show that the fiscal rule was highly effective at reducing operating costs and the probability of a current deficit, with no changes in capital spending (i.e., no creative accounting). This large reduction in operating expenses came at no meaningful cost in terms of local public goods and living standards, as proxied by education and health indicators, night lights, and sanctions for corruption. Adoption of the rule increased electoral support for the party of the incumbent mayor and weakly reduced protests against the municipal government. This suggests that fiscal rules can improve political agency in settings, like Colombia, with weak political parties and limited career concerns for local politicians.
The series this semester will either be held virtually on Zoom or in ICC 550. This seminar is joint with the World Bank. It begins on Thursday afternoons at 12:30pm EST. A registration link will be shared with our seminar mailing list the week before.
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