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Session Overview
C07: Rules, Infrastructure and Debt
Wednesday, 18/Aug/2021:
2:15pm - 3:45pm

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2:15pm - 2:37pm

Fiscal Rules Of Local Debt And Financial Flexibility Of Municipally-Owned Companies

Anna Białek-Jaworska, Agnieszka Kopańska

University of Warsaw, Poland

This paper aims to verify whether local governments use municipally-owned corporations (MOCs) to avoid fiscal debt limits set by public finance law. If yes, how this off-budget indebtedness influences the financial flexibility of MOCs. We exploit the natural experiment of introducing new fiscal debt limits in Polish local governments in 2014 using panel data of unique 1294 MOCs owned by 756 municipalities for 2010-2018. We confirm that municipal services’ corporatization is oriented toward overcoming the new restrictive fiscal debt rules via off-budget debt.

MOCs’ debt subsidizes local public debt after 2014 when new indebtedness restrictions imposed on municipalities were in force. Consequently, tightening of fiscal rules related to sub-sovereign indebtedness decrease MOCs’ financial flexibility measured by unused debt capacity while increasing their cash holdings, except for water service MOCs. Municipalities with lower debt capacity limited by the new fiscal debt rules have higher off-budget debt issued by transport MOCs.

Białek-Jaworska-Fiscal Rules Of Local Debt And Financial Flexibility Of Municipally-Owned Companies-274.pdf

2:37pm - 3:00pm

No Regret Fiscal Reforms: Rule Vs Discretion Revisited

Pierre-Edouard Collignon

CREST - Ecole polytechnique, France

How can labour and capital taxes react to shocks while preserving incentives to work and save? While the standard solution involves a commitment to a contingent policy, this paper introduces No Regret fiscal reforms defined as changes in current and future policy such that households do not regret their previous savings decisions. Hence flexibility is provided and incentives to save are preserved. Such reforms can be achieved by changing taxes both on capital and labour such that wealth effects exactly compensates substitution effects. Optimal No Regret policies are compared to optimal contingent policies in a representative agent framework. First, when shocks and their distributions are common knowledge, optimal no regret policies only lead to small welfare losses. Second, when the distribution of shocks is itself uncertain, welfare differences are reduced and may even disappear. Introducing wealth and skill heterogeneity, I establish the existence and partial characterization of No Regret reforms.

Collignon-No Regret Fiscal Reforms-395.pdf

3:00pm - 3:22pm

Effect of an Income Shock on Subnational Debt: Micro Evidence from Mexico

Mariela Dal Borgo

Banco de México, Mexico

This paper examines how the borrowing decisions of local governments respond to an income shock. The shock stems from the updating of population census data that affects the distribution of federal transfers. For a one-standard-deviation increase in the population shock, I find that federal transfers to Mexican municipalities increase by 2% over the first two post-census years. Using supervisory loan-level data, I show that the probability of municipalities being indebted declines by 0.1 percentage points over this period. The response is driven by governments less dependent on transfers, which lenders perceive as more creditworthy. These findings reveal a small capacity to smooth shocks in credit markets, restricted to few governments with a diversified revenue base. There is no evidence of a positive grant effect on local debt, not even when the lender is public. The additional revenue mostly goes to finance current expenditures, with limited potential to alter the path of local development.

Dal Borgo-Effect of an Income Shock on Subnational Debt-146.pdf

3:22pm - 3:45pm

Northern Roads And Economic Development

Thomas Stringer, Marcelin Joanis

Polytechnique Montreal, Canada

Road connection is viewed as an important driver of economic development. However, for remote subarctic communities, it can also mean a huge change in their way of life. How large are the socio-economic benefits of road connection? This paper uses census data from Northern Quebec and Labrador to assess the effects of road connection on municipalities connected between 1986 and 2016. Using a difference-in-differences regression model assorted with robustness checks, we find that road connection is correlated with increased employment rates and educational attainment and decreased unemployment. While we also find positive and significant correlations between road connection and income in many specifications, that particular result is not robust when ensuring that error terms are not subject to cross-sectional dependence. Overall, our results support the conjecture that road connection of remote municipalities generates non-negligible economic benefits.

Stringer-Northern Roads And Economic Development-202.pdf

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