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The Macroeconomic Effects of Fiscal Rules in the US States

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Author Info
Fatás, Antonio
Mihov, Ilian

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Abstract

Fiscal policy restrictions are often criticized for limiting the ability of governments to react to business cycle fluctuations. Therefore, the adoption of quantitative restrictions is viewed as inevitably leading to increased macroeconomic volatility. In this Paper we use data from 48 US states to investigate how budget rules affect fiscal policy outcomes. Our key findings are that (1) strict budgetary restrictions lead to lower policy volatility (i.e. less discretion in conducting fiscal policy); and (2) fiscal restrictions reduce the responsiveness of fiscal policy to output shocks and decrease the persistence of spending fluctuations. These two results should have opposite effects on output volatility. While less discretion should reduce volatility, less responsiveness of fiscal policy might amplify business cycle volatility. Our analysis shows that the first effect dominates and that restrictions on fiscal policy lead to less volatility in output.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4372.

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Date of creation: Apr 2004
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Handle: RePEc:cpr:ceprdp:4372

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Related research
Keywords: business cycles fiscal policy fiscal rules

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

Cited by:
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  1. António Afonso & Davide Furceri, 2008. "Government size, composition, volatility and economic growth," Working Paper Series 849, European Central Bank. [Downloadable!]
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  2. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile 458, Central Bank of Chile. [Downloadable!]
  3. Darvas, Zsolt & Rose, Andrew K & Szapáry, György, 2005. "Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic," CEPR Discussion Papers 5188, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Rasmus Kattai & John Lewis, 2005. "Hooverism, Hyperstabilisation or Halfway-House? Describing Fiscal Policy in Central and Eastern European EU Members," Bank of Estonia Working Papers 2005-05, Bank of Estonia, revised 10 Oct 2005. [Downloadable!]
  5. P R Agénor & D Yilmaz, 2006. "The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 73, Economics, The Univeristy of Manchester. [Downloadable!]
  6. Christian Volpe Martincus & Andrea Molinari, 2007. "Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 140-178, April. [Downloadable!] (restricted)
  7. Rasmus Kattai & John Lewis, 2004. "Hooverism, hyperstabilisation or halfway-house? describing fiscal policy in Estonia 1996-2003," Bank of Estonia Working Papers 2004-04, Bank of Estonia, revised 10 Oct 2004. [Downloadable!]
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