DP1029 Restraining Yourself: Fiscal Rules and Stabilization

Author(s): Tamim Bayoumi, Barry Eichengreen
Publication Date: September 1994
Keyword(s): Fiscal Restraints, Fiscal Stabilization
JEL(s): E62, H61, H74
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1029

State budgets in the United States played a significant macroeconomic role in the 1970s and 1980s, and the level of cyclical responsiveness was affected by the severity of statutory and constitutional fiscal restraints. Moving from no fiscal restraints to the most stringent restraints lowered the fiscal offset to income fluctuations by around 40%. Simulations indicate that a reduction in aggregate fiscal stabilizers of this size could lead to a significant increase in the variance of aggregate output.