Public Financing Under Balanced Budget Rules

45 Pages Posted: 27 Jun 2022 Last revised: 6 Feb 2023

See all articles by Minjie Deng

Minjie Deng

Simon Fraser University, Department of Economics

Chang Liu

National University of Singapore (NUS), Department of Economics

Date Written: June 18, 2022

Abstract

This paper analyzes the impact of a balanced budget rule (BBR) on government financing
cost and its implications for the government balance sheet. Exploiting the variation in BBR
implementation across different states, we find that states with more stringent BBRs exhibit
significantly lower debt spreads and credit default swap spreads, demonstrating the crucial
role of default risk. A sovereign default model incorporating BBRs aligns with the empirical
results. Our quantitative analysis suggests that implementing a BBR in Illinois could decrease
the state bond spread by approximately 50% and lower the debt by a third within a decade.
Additionally, we compare the effects of BBRs with those of alternative fiscal rules.

Keywords: Public financing, balanced budget rule, sovereign default risk, state government, fiscal rule

JEL Classification: E62, F34

Suggested Citation

Deng, Minjie and Liu, Chang, Public Financing Under Balanced Budget Rules (June 18, 2022). Available at SSRN: https://ssrn.com/abstract=4140495 or http://dx.doi.org/10.2139/ssrn.4140495

Minjie Deng (Contact Author)

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.minjiedeng.me/

Chang Liu

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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