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Fiscal Policy Cyclicality and Growth within the US States

Author

Listed:
  • Svec Justin

    (College of the Holy Cross)

  • Kondo Ayako

    (Hosei University)

Abstract

This paper exploits differences in the stringency of balanced budget rules across US states to estimate the effect of the cyclicality of fiscal policy on state GDP growth. While most states have passed laws restricting deficits, the nature and strictness of these laws vary greatly. States with more stringent balanced budget restrictions run more procyclical fiscal policy. We use the diversity in these laws as an instrument for the cyclicality of policy. We find evidence that a more counter-cyclical primary deficit increases a state's average growth rate per capita. This effect is robust to a number of alternative specifications. One concrete policy implication of this analysis is that a state could increase its annual growth rate by relaxing its balanced budget restrictions.

Suggested Citation

  • Svec Justin & Kondo Ayako, 2012. "Fiscal Policy Cyclicality and Growth within the US States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-35, March.
    • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:2:n:2
    DOI: 10.1515/1935-1690.2166
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    Cited by:

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    2. Jiri Jonas, 2012. "Great Recession and Fiscal Squeeze at U.S. Subnational Government Level," IMF Working Papers 2012/184, International Monetary Fund.
    3. Schelkle, Waltraud, 2017. "Hamilton�s Paradox Revisited: Alternative lessons from US history," CEPS Papers 12963, Centre for European Policy Studies.
    4. Ellen C. Seljan, 2015. "Ready to Bargain: The Effect of Fiscal Stress on Supermajority Requirements to Raise Taxes," Public Budgeting & Finance, Wiley Blackwell, vol. 35(3), pages 24-43, September.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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