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Balanced Budgets and Business Cycles: Evidence from the States

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  • Levinson, Arik
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    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.

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    File URL: http://ntj.tax.org/wwtax/ntjrec.nsf/notesview/6E7DBA2BCB0B358A85256AFC007EFC69/$file/v51n4715.pdf
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    Bibliographic Info

    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 51 (1998)
    Issue (Month): n. 4 (December Citation: 51 National Tax Journal 715-32 (December 1998))
    Pages: 715-32

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    Handle: RePEc:ntj:journl:v:51:y:1998:i:n._4:p:715-32

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    1. James M. Poterba, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," NBER Working Papers 5449, National Bureau of Economic Research, Inc.
    2. James M. Poterba, 1995. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Jean-Paul Lam & William Scarth, 2002. "Alternative Public Spending Rules and Output Volatility," Macroeconomics 0211005, EconWPA.
    2. Thomas A. Garrett & Gary A. Wagner, 2003. "State government finances: World War II to the current crisis," Working Papers 2003-035, Federal Reserve Bank of St. Louis.
    3. Ayako Kondo & Justin Svec, 2009. "Fiscal Policy Cyclicality and Growth within the U.S. States," Working Papers 0911, College of the Holy Cross, Department of Economics.
    4. 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.
    5. António Afonso & Davide Furceri, 2008. "Government Size, Composition, Volatility and Economic Growth," Working Papers Department of Economics 2008/04, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    6. Fatás, Antonio & Mihov, Ilian, 2004. "The Macroeconomic Effects of Fiscal Rules in the US States," CEPR Discussion Papers 4372, C.E.P.R. Discussion Papers.
    7. Mahdavi, Saeid & Westerlund, Joakim, 2011. "Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 953-969.
    8. Rafal Benecki & Jens Hölscher & Mariusz Jarmuzek, 2006. "Fiscal Transparency And Policy Rules In Poland," Working Papers 65, CENTRE FOR THE STUDY OF ECONOMIC AND SOCIAL CHANGE IN EUROPE,School of Slavonic and East European Studies,University College London (SSEES,UCL).
    9. Gary Wagner & Russell Sobel, 2006. "State budget stabilization fund adoption: Preparing for the next recession or circumventing fiscal constraints?," Public Choice, Springer, vol. 126(1), pages 177-199, January.
    10. Wagner, Gary A., 2003. "Are state budget stabilization funds only the illusion of savings?: Evidence from stationary panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 213-238.
    11. Lan, Yuexing & Sylwester, Kevin, 2010. "Provincial fiscal positions and business cylce synchronization across China," Journal of Asian Economics, Elsevier, vol. 21(4), pages 355-364, August.
    12. Gonzalez, Christian Y. & Paqueo, Vicente B., 2003. "Social sector expenditures and rainy-day funds," Policy Research Working Paper Series 3131, The World Bank.

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