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Do Budget Rules Work?

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  • James M. Poterba

Abstract

The design of budget rules and institutions, long a neglected area in public finance and macroeconomics, has recently been thrust to center stage by the debate over a balanced budget amendment and other deficit-reduction measures in the United States. This paper describes the existing evidence on how budget rules affect fiscal policy outcomes. It contrasts the `institutional irrelevance view,' which holds that budget rules can be circumvented by modifying accounting practices and changing the nominal timing or other classification of taxes and expenditures, with the `public choice view' in which fiscal institutions represent important constraints on the behavior of political actors. Several distinct strands of empirical evidence, from the U.S. federal experience with anti-deficit rules, from U.S. state experience with balanced budget rules, and from international comparisons of budget outcomes in nations with different fiscal institutions, suggest that fiscal institutions do matter. These results reject the institutional irrelevance view. The existing evidence is not refined enough, however, to provide detailed advice on how narrowly-defined changes in budget rules might affect policy outcomes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5550.

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Date of creation: Apr 1996
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Publication status: published as in A.Auerbach ed., Fiscal Policy: Lessons From Empirical Research (Cambridge: MIT Press, 1997) pp.53-86
Handle: RePEc:nbr:nberwo:5550

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  1. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  2. Alberto Alesina & Ricardo Hausmann & Rudolf Hommes & Ernesto Stein, 1996. "Budget Institutions and Fiscal Performance in Latin America," NBER Working Papers 5586, National Bureau of Economic Research, Inc.
  3. Gramlich, Edward M, 1990. "U.S. Federal Budget Deficits and Gramm-Rudman-Hollings," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 75-80, May.
  4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts: A Meaningful Alternative to Deficit Accounting," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.
  5. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  6. Reischauer, Robert D., 1990. "Taxes and Spending Under Gramm-Rudman-Hollings," National Tax Journal, National Tax Association, vol. 43(3), pages 223-32, September.
  7. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  8. Weingast, Barry R & Marshall, William J, 1988. "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 132-63, February.
  9. Douglas Holtz-Eakin, 1988. "The Line Item Veto and Public Sector Budgets: Evidence from the States," NBER Working Papers 2531, National Bureau of Economic Research, Inc.
  10. repec:fth:eeccco:96 is not listed on IDEAS
  11. Holtz-Eakin, Douglas, 1988. "The line item veto and public sector budgets : Evidence from the states," Journal of Public Economics, Elsevier, Elsevier, vol. 36(3), pages 269-292, August.
  12. Ronald J. Shadbegian, 1996. "Do Tax And Expenditure Limitations Affect The Size And Growth Of State Government?," Contemporary Economic Policy, Western Economic Association International, vol. 14(1), pages 22-35, 01.
  13. Preston, Anne E. & Ichniowski, Casey, 1991. "A National Perspective on the Nature and Effects of the Local Property Tax Revolt, 1976-1986," National Tax Journal, National Tax Association, vol. 44(2), pages 123-45, June.
  14. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1088, C.E.P.R. Discussion Papers.
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