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Balanced Budgets and Business Cycles: Evidence from the States

  • Levinson, Arik

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.

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File URL: http://www.ntanet.org/NTJ/51/4/ntj-v51n04p715-32-balanced-budgets-business-cycles.pdf
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File URL: http://www.ntanet.org/NTJ/51/4/ntj-v51n04p715-32-balanced-budgets-business-cycles.html
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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 51 (1998)
Issue (Month): n. 4 (December)
Pages: 715-32

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Handle: RePEc:ntj:journl:v:51:y:1998:i:n._4:p:715-32
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  1. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
  2. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
  3. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
  4. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
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