Fiscal Rules, What Does the American Experience Tell Us?

43 Pages Posted: 18 Dec 2012

See all articles by Byron F. Lutz

Byron F. Lutz

Board of Governors of the Federal Reserve System

Glenn R. Follette

Board of Governors of the Federal Reserve System

Date Written: May 1, 2012

Abstract

We examine the effect of balanced budget rules on budget outcomes in the U.S. from the mid-1980s through the present. Rules at both the federal level and the state level are considered. Given the relatively short duration of the federal rules and corresponding lack of data points, we adopt a narrative approach. Our examination fails to uncover evidence that the statutory rules at the federal level have influenced the size of deficits. The laboratory of the states provides more fertile ground for econometric testing of the influence of balanced budget rules. We test the hypothesis that the strength of a state's balanced budget rule influences its response to unanticipated budget shocks. We conclude that rules at the state-level have had a significant influence on budget outcomes.

Keywords: budget rules, fiscal rules, deficits, balanced budget rules

JEL Classification: H61, H62, H72

Suggested Citation

Lutz, Byron F. and Follette, Glenn R., Fiscal Rules, What Does the American Experience Tell Us? (May 1, 2012). FEDS Working Paper No. 2012-38, Available at SSRN: https://ssrn.com/abstract=2191191 or http://dx.doi.org/10.2139/ssrn.2191191

Byron F. Lutz (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Glenn R. Follette

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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