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Do fiscal rules dampen the political business cycle?

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  • Shanna Rose

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    Abstract

    This paper develops and tests the theory that fiscal rules limit politicians' ability to manipulate the budget for electoral gain. Using panel data from the American states, I find evidence suggesting that stringent balanced budget rules dampen the political business cycle. That is, while spending rises before and falls after elections in states that can carry deficits into the next fiscal year, this pattern does not exist in states with strict “no-carry” rules. Neither binding gubernatorial term limits nor the partisan composition of government appear to significantly affect the magnitude of the political business cycle. Copyright Springer Science+Business Media, Inc. 2006

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    File URL: http://hdl.handle.net/10.1007/s11127-005-9007-7
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    Bibliographic Info

    Article provided by Springer in its journal Public Choice.

    Volume (Year): 128 (2006)
    Issue (Month): 3 (September)
    Pages: 407-431

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    Handle: RePEc:kap:pubcho:v:128:y:2006:i:3:p:407-431

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    Web page: http://www.springerlink.com/link.asp?id=100332

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    1. Alesina, Alberto F & Cohen, Gerald D & Roubini, Nouriel, 1992. "Macroeconomic Policy and Elections in OECD Democracies," CEPR Discussion Papers 608, C.E.P.R. Discussion Papers.
    2. Alberto Alesina & Gerald D. Cohen & Nouriel Roubini, 1992. "Macroeconomic Policy And Elections In Oecd Democracies," Economics and Politics, Wiley Blackwell, vol. 4(1), pages 1-30, 03.
    3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    4. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
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    7. Adi Brender & Allan Drazen, 2004. "Political Budget Cycles in New versus Established Democracies," NBER Working Papers 10539, National Bureau of Economic Research, Inc.
    8. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
    9. Block, Steven A., 2002. "Political business cycles, democratization, and economic reform: the case of Africa," Journal of Development Economics, Elsevier, vol. 67(1), pages 205-228, February.
    10. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    11. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, vol. 44(2), pages 199-210, March.
    12. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
    13. Henning Bohn & Robert P. Inman, 1996. "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States," NBER Working Papers 5533, National Bureau of Economic Research, Inc.
    14. Cohen, Gerald & Alesina, Alberto & Roubini, Nouriel, 1992. "Macroeconomic Policy and Elections in OECD Democracies," Scholarly Articles 4553023, Harvard University Department of Economics.
    15. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    16. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
    17. John Mikesell, 1978. "Election periods and state tax policy cycles," Public Choice, Springer, vol. 33(3), pages 99-106, January.
    18. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Better Balanced Budget Amendment
      by Matt Mitchell in Neighborhood Effects on 2011-08-05 21:27:41
    2. Balanced Budget Rules and Unintended Consequences
      by Matt Mitchell in Neighborhood Effects on 2011-07-21 14:22:27
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    Cited by:
    1. Marina, Azzimonti & Marco, Battaglini & Stephen, Coate, 2010. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," MPRA Paper 25935, University Library of Munich, Germany.
    2. Marek Hanusch & Daniel Magleby, 2014. "Popularity, polarization, and political budget cycles," Public Choice, Springer, vol. 159(3), pages 457-467, June.
    3. Bernardino Benito & Francisco Bastida & Cristina Vicente, 2013. "Municipal elections and cultural expenditure," Journal of Cultural Economics, Springer, vol. 37(1), pages 3-32, February.
    4. Jorge Streb & Gustavo Torrens, 2013. "Making rules credible: divided government and political budget cycles," Public Choice, Springer, vol. 156(3), pages 703-722, September.
    5. Christian Bjørnskov & Niklas Potrafke, 2013. "The size and scope of government in the US states: does party ideology matter?," International Tax and Public Finance, Springer, vol. 20(4), pages 687-714, August.
    6. Toke Aidt & Graham Mooney, 2014. "Voter suffrage and the political budget cycle: evidence from the London Metropolitan Boroughs 1902-1937," Cambridge Working Papers in Economics 1401, Faculty of Economics, University of Cambridge.
    7. Marek Hanusch, 2012. "Coalition incentives for political budget cycles," Public Choice, Springer, vol. 151(1), pages 121-136, April.
    8. Jakob Haan & Jeroen Klomp, 2013. "Conditional political budget cycles: a review of recent evidence," Public Choice, Springer, vol. 157(3), pages 387-410, December.
    9. Daniel Lema & Jorge M. Streb, 2013. "Party alignment and political budget cycles: the Argentine provinces," CEMA Working Papers: Serie Documentos de Trabajo. 520, Universidad del CEMA.
    10. repec:cge:warwcg:84 is not listed on IDEAS
    11. Yilin Hou & Daniel Smith, 2010. "Do state balanced budget requirements matter? Testing two explanatory frameworks," Public Choice, Springer, vol. 145(1), pages 57-79, October.
    12. Andersen, Asger Lau & Lassen, David Dreyer & Nielsen, Lasse Holbøll Westh, 2014. "The impact of late budgets on state government borrowing costs," Journal of Public Economics, Elsevier, vol. 109(C), pages 27-35.
    13. Toke Aidt & Graham Mooney, 2014. "Voting Suffrage and the Political Budget Cycle: Evidence from the London Metropolitan Boroughs 1902-1937," CESifo Working Paper Series 4614, CESifo Group Munich.
    14. George A. Krause & David E. Lewis & James W. Douglas, 2013. "Politics Can Limit Policy Opportunism in Fiscal Institutions: Evidence from Official General Fund Revenue Forecasts in the American States," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 32(2), pages 271-295, 03.

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