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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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    Bibliographic Info

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

    Volume (Year): 51 (1998)
    Issue (Month): n. 4 (December)
    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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    References

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    1. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
    2. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
    3. 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.
    4. James M. Poterba, 1993. "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. Gonzalez, Christian Y. & Paqueo, Vicente B., 2003. "Social sector expenditures and rainy-day funds," Policy Research Working Paper Series 3131, The World Bank.
    2. Jean-Paul Lam & William Scarth, 2002. "Alternative Public Spending Rules and Output Volatility," Working Papers 02-37, Bank of Canada.
    3. 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.
    4. Jeffrey Clemens & Stephen Miran, 2012. "Fiscal Policy Multipliers on Subnational Government Spending," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 46-68, May.
    5. 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.
    6. Heiko T. Burret & Lars P. Feld, 2014. "A Note on Budget Rules and Fiscal Federalism," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 12(1), pages 03-11, 04.
    7. Thomas A. Garrett & Gary A. Wagner, 2004. "State government finances: World War II to the current crises," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 9-25.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. Rafal Benecki & Jens Hölscher & Mariusz Jarmuzek, 2006. "Fiscal Transparency and Policy Rules in Poland," CASE Network Studies and Analyses 0327, CASE-Center for Social and Economic Research.
    14. 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.
    15. Clemens, Jeffrey, 2013. "State Fiscal Adjustment During Times of Stress: Possible Causes of the Severity and Composition of Budget Cuts," MPRA Paper 55921, University Library of Munich, Germany.
    16. Fabrizio Balassone & Maura Francese & Stefania Zotteri, 2008. "Cyclical asymmetry in fiscal variables," Temi di discussione (Economic working papers) 671, Bank of Italy, Economic Research and International Relations Area.

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