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Is state fiscal policy asymmetric over the business cycle?

Author

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  • Bent E. Sorensen
  • Oved Yosha

Abstract

A number of stabilizers are thought to mute the business cycle. One key stabilizer is federal fiscal policy. The federal budget surplus tends to rise during economic booms and fall in downturns, helping to stabilize consumers’ disposable income and thereby mitigate economic fluctuations. During booms, for example, the budget surplus typically rises because tax revenues rise more than expenditures.> Another stabilizer that has traditionally received less attention is state fiscal policy. Like the federal budget surplus, state government surpluses tend to rise during economic expansions and decline during downturns. Moreover, like the federal budget, state budgets represent large shares of the economy. The stabilizing influence of state fiscal policy, however, may differ across business cycle expansions and downturns – making state fiscal policy asymmetric. For example, state budgets could be more effective at mitigating economic slumps than at muting booms if taxes fall more sharply during a slump than they rise in an expansion of equal magnitude. Asymmetry in fiscal policy could be caused by a number of factors, such as balanced budget rules, which are constitutionally imposed restrictions on a state government’s ability to incur debt.> Sorensen and Yosha examine the business cycle behavior of state fiscal policy to determine whether policy is asymmetric and, if so, to identify the causes. They conclude that state revenue and expenditure display significant asymmetry over the business cycle, with nearly offsetting effects on the budget surplus. As a result, state fiscal policy tends to mute economic booms to roughly the same degree it mitigates slowdowns. The asymmetries in revenue and expenditure appear to be associated with balanced budget rules, although their fundamental causes cannot be clearly identified.

Suggested Citation

  • Bent E. Sorensen & Oved Yosha, 2001. "Is state fiscal policy asymmetric over the business cycle?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 43-64.
  • Handle: RePEc:fip:fedker:y:2001:i:qiii:p:43-64:n:v.86no.3
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    Cited by:

    1. Roberta Moreira Wichmann & Marcelo Savino Portugal, 2014. "Política Fiscal Assimétrica: O Caso Do Brasil," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 038, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Guerguil, Martine & Mandon, Pierre & Tapsoba, René, 2017. "Flexible fiscal rules and countercyclical fiscal policy," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 189-220.
    3. repec:fgv:epgrbe:v:67:n:3:a:6 is not listed on IDEAS
    4. 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;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(1), pages 140-178, April.
    5. C. Randall HENNING & Martin KESSLER, 2012. "Fiscal Federalism: US History for Architects of Europe’s Fiscal Union," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 1-31.
    6. Wichmann, Roberta Moreira & Portugal, Marcelo Savino, 2013. "Política Fiscal Assimétrica: O Caso do Brasil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 67(3), September.
    7. Edelman, Mark, 2003. "Appraisal Comments on Tax Increment Financing Effectiveness in the Context of Evaluating Iowa Tax Policy Alternatives," Staff General Research Papers Archive 10207, Iowa State University, Department of Economics.
    8. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1486-1508, June.

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    Keywords

    Fiscal policy ; Business cycles;

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