In this paper we argue that rules are desirable in the conduct of fiscal policy. Since the market does not constrain federal borrowing, policy-imposed constraints are necessary to maintain fiscal prudence. A simple rule such as the annually balanced budget is sufficient for fiscal prudence but is extremely pro-cyclical. We explore the problem of specifying a rule which maintains fiscal prudence and permits counter-cyclical policy.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
536.