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Fiscal Policy Cyclicality and Growth within the U.S. States

Listed author(s):
  • Ayako Kondo

    ()

    (Institute for Social and Economic Research, Osaka University)

  • Justin Svec

    ()

    (Department of Economics, College of the Holy Cross)

We exploit differences in the stringency of balanced budget rules across US states to estimate the effect of fiscal policy cyclicality 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 state government spending. We find modest evidence that more counter-cyclical public expenditure increases a state's average growth rate per capita. Further, our point estimates suggest that a state could increase its annual growth rate by 0.4% by relaxing the "ex-post" balanced budget restriction. This estimated effect is statistically significant at the 10% level in our basic specification, but loses its significance when we control for the initial debt to GDP ratio.

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File URL: http://web.holycross.edu/RePEc/hcx/HC0911-Kondo-Svec_FiscalCyclicality.pdf
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Paper provided by College of the Holy Cross, Department of Economics in its series Working Papers with number 0911.

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Length: 31 pages
Date of creation: Aug 2009
Handle: RePEc:hcx:wpaper:0911
Contact details of provider: Phone: (508)793-3362
Fax: (508) 793-3708
Web page: http://www.holycross.edu/departments/economics/website/

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