Balanced Budgets and Business Cycles: Evidence from the States
This paper presents evidence that stringent balanced budget requirements enforced in some U.S. states have exacerbated business cycles in those states. The effect is not apparent directly. However, among states where fiscal policy may have more macroeconomic consequences (large states), the difference in volatility between states with lenient and strict balanced budget rules is larger (more negative or less positive) than among states where fiscal policy may be less relevant (small states). Two implications are suggested: (1) states’ fiscal policies have real macroeconomic consequences, and (2) strict balanced budget requirements increase business cycle volatility.
Volume (Year): 51 (1998)
Issue (Month): n. 4 (December)
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- Bohn, Henning & Inman, Robert P., 1996.
"Balanced-budget rules and public deficits: evidence from the U.S. states,"
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University of Chicago Press, vol. 102(4), pages 799-821, August.
- James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
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