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Balanced Budgets and Business Cycles: Evidence From the States*

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  • Levinson, Arik

Abstract

This paper presents evidence that stringent balanced budget requirements enforced in some U.S. states have exacerbated business cycles in those states. The effect is not apparent directly. However, among states where fiscal policy may have more macroeconomic consequences (large states), the difference in volatility between states with lenient and strict balanced budget rules is larger (more negative or less positive) than among states where fiscal policy may be less relevant (small states). Two implications are suggested: (1) states’ fiscal policies have real macroeconomic consequences, and (2) strict balanced budget requirements increase business cycle volatility.

Suggested Citation

  • Levinson, Arik, 1998. "Balanced Budgets and Business Cycles: Evidence From the States," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(4), pages 715-732, December.
    • Handle: RePEc:ntj:journl:v:51:y:1998:i:4:p:715-32
    DOI: 10.1086/NTJ41789364
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    References listed on IDEAS

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    1. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
    2. Alt, James E. & Lowry, Robert C., 1994. "Divided Government, Fiscal Institutions, and Budget Deficits: Evidence from the States," American Political Science Review, Cambridge University Press, vol. 88(4), pages 811-828, December.
    3. 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.
    4. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-334, June.
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    Replication

    This item has been replicated by:
  • Robert Krol & Shirley Svorny, 2007. "Budget Rules and State Business Cycles," Public Finance Review, , vol. 35(4), pages 530-544, July.

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