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Title: The Macroeconomic Effects of Fiscal Rules in the US States

Author(s): Antonio Fat�s and Ilian Mihov

Publication Date: April 2004

Keyword(s): business cycles, fiscal policy and fiscal rules

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Fat�s, A and Mihov, I. 2004. 'The Macroeconomic Effects of Fiscal Rules in the US States'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4372