The Macroeconomic Effects of Fiscal Rules in the Us States

28 Pages Posted: 21 May 2004

See all articles by Antonio Fatás

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Ilian Mihov

INSEAD; Centre for Economic Policy Research (CEPR)

Date Written: April 2004

Abstract

Fiscal policy restrictions are often criticized for limiting the ability of governments to react to business cycle fluctuations. Therefore, the adoption of quantitative restrictions is viewed as inevitably leading to increased macroeconomic volatility. In this Paper, we use data from 48 US states to investigate how budget rules affect fiscal policy outcomes. Our key findings are that (1) strict budgetary restrictions lead to lower policy volatility (i.e., less discretion in conducting fiscal policy); and (2) fiscal restrictions reduce the responsiveness of fiscal policy to output shocks and decrease the persistence of spending fluctuations. These two results should have opposite effects on output volatility. While less discretion should reduce volatility, less responsiveness of fiscal policy might amplify business cycle volatility. Our analysis shows that the first effect dominates and that restrictions on fiscal policy lead to less volatility in output.

Keywords: Fiscal policy, business cycles, fiscal rules

JEL Classification: E32, H30

Suggested Citation

Fatas, Antonio and Mihov, Ilian, The Macroeconomic Effects of Fiscal Rules in the Us States (April 2004). CEPR Discussion Paper No. 4372. Available at SSRN: https://ssrn.com/abstract=549223

Antonio Fatas (Contact Author)

INSEAD ( email )

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HOME PAGE: http://faculty.insead.edu/fatas

Centre for Economic Policy Research (CEPR)

London
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ABFER ( email )

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Ilian Mihov

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, Singapore 138680
Singapore
+65 6799 5434 (Phone)

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/personal/imihov/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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