Fiscal Rules and Window Dressing: The Case of Italian Municipalities

One of the measure of the effectiveness of fiscal rules is their level of compliance, especially when sub-national fiscal rules are considered. However, the compliance level can be a misleading proxy for the impact of the rules, given the possibilities that fiscal rules trigger window dressing and creative finance. We use evidence from the Italian municipalities budgets, to test the presence of creative accounting as the consequence of subnational fiscal rules, in a context in which the levels of compliance are generally very high but the status of local finance is very poor. A quasi experimental approach is allowed by the special regulation of the Italian Internal Stability Pact between 1999 and 2004.