Title
Law, Focal Points, and Fiscal Discipline in the United States and the European Union
Document Type
Article
Publication Date
5-2014
Journal Title
American Political Science Review
Volume
108
Number
2
Pages
355-370
Publisher
Cambridge University Press
Abstract
Many studies suggest that strict balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Why might public officials adhere to a rule that is practically never enforced in court? Existing literature points to a legal deterrence logic in which the threat of judicial enforcement deters sovereigns from violating the rules in the first place. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on U.S. states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.
Recommended Citation
Teo, Terence and Kelemen, Daniel, "Law, Focal Points, and Fiscal Discipline in the United States and the European Union" (2014). Political Science Publications. 48.
https://scholarship.shu.edu/political-science-publications/48
