Do Fiscal Constraints Prevent Default? Historical Evidence from U.S. Municipalities

36 Pages Posted: 13 Apr 2015 Last revised: 10 Sep 2015

See all articles by John A. Dove

John A. Dove

Troy University -- Department of Economics, Finance, & RMI

Date Written: September 1, 2015

Abstract

Through the nineteenth century numerous U.S. states developed extensive municipal fiscal constitutions. These generally came in the wake of financial crises and large-scale default of public debts. Although the constraints were imposed in order to minimize the likelihood that such outcomes would occur in the future, little work has been undertaken to analyze whether they were successful in achieving that goal. Therefore, this current study attempts to do so by empirically investigating how procedural safeguards and outright prohibitions on debt accumulation, along with hard budget constraints, and tax limits impacted the likelihood of default. This is done by evaluating municipal defaults that centered on the Panic of 1893. Overall, the results suggest that outright prohibitions on debt accumulation and hard budget constraints actually reduced the likelihood of municipal default across states, while tax limits and procedural safeguards increased that likelihood.

Keywords: Default, Sovereign Debt, Fiscal Constraints, Panic of 1893, Credible Commitments

JEL Classification: D78, H73, H74, N21, N41

Suggested Citation

Dove, John A., Do Fiscal Constraints Prevent Default? Historical Evidence from U.S. Municipalities (September 1, 2015). Economics of Governance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2593344 or http://dx.doi.org/10.2139/ssrn.2593344

John A. Dove (Contact Author)

Troy University -- Department of Economics, Finance, & RMI ( email )

137I John Robert Lewis Hall
Troy, AL 36082
United States

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