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Fiscal Policy Multipliers on Subnational Government Spending

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  • Jeffrey Clemens
  • Stephen Miran

Abstract

Balanced budget requirements lead to substantial pro-cyclicality in state government spending, with the stringency of a state's rules driving the pace at which it must adjust to shocks. We show that fiscal institutions can generate natural experiments in deficit-financed spending that are informative regarding fiscal stabilization policy. Alternative sources of variation in subnational fiscal policy often implicitly involve "windfall" financing, which precludes any effect of future debt or taxation on current consumption and investment. Consistent with a role for these "Ricardian" effects, our estimates are smaller than those in related studies, implying an on-impact multiplier below 1. (JEL C51, E32, E62, H72)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 46-68

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:46-68

Note: DOI: 10.1257/pol.4.2.46
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  1. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  2. Robert Krol & Shirley Svorny, 2007. "Budget Rules and State Business Cycles," Public Finance Review, , vol. 35(4), pages 530-544, July.
  3. Jaeger, Albert, 1994. "Mechanical Detrending by Hodrick-Prescott Filtering: A Note," Empirical Economics, Springer, vol. 19(3), pages 493-500.
  4. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Levinson, Arik, 1998. "Balanced Budgets and Business Cycles: Evidence from the States," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 715-32, December.
  7. Lauren Cohen & Joshua D. Coval & Christopher Malloy, 2010. "Do Powerful Politicians Cause Corporate Downsizing?," NBER Working Papers 15839, National Bureau of Economic Research, Inc.
  8. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle.
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