Do Budget Rules Work?

61 Pages Posted: 19 May 1998 Last revised: 1 Oct 2010

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: April 1996

Abstract

The design of budget rules and institutions, long a neglected area in public finance and macroeconomics, has recently been thrust to center stage by the debate over a balanced budget amendment and other deficit-reduction measures in the United States. This paper describes the existing evidence on how budget rules affect fiscal policy outcomes. It contrasts the `institutional irrelevance view,' which holds that budget rules can be circumvented by modifying accounting practices and changing the nominal timing or other classification of taxes and expenditures, with the `public choice view' in which fiscal institutions represent important constraints on the behavior of political actors. Several distinct strands of empirical evidence, from the U.S. federal experience with anti-deficit rules, from U.S. state experience with balanced budget rules, and from international comparisons of budget outcomes in nations with different fiscal institutions, suggest that fiscal institutions do matter. These results reject the institutional irrelevance view. The existing evidence is not refined enough, however, to provide detailed advice on how narrowly-defined changes in budget rules might affect policy outcomes.

Suggested Citation

Poterba, James M., Do Budget Rules Work? (April 1996). NBER Working Paper No. w5550. Available at SSRN: https://ssrn.com/abstract=4019

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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