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Fiscal Policy Cyclicality and Growth within the U.S. States

Author

Listed:
  • Ayako Kondo

    (Institute for Social and Economic Research, Osaka University)

  • Justin Svec

    (Department of Economics, College of the Holy Cross)

Abstract

We exploit differences in the stringency of balanced budget rules across US states to estimate the effect of fiscal policy cyclicality on state GDP growth. While most states have passed laws restricting deficits, the nature and strictness of these laws vary greatly. States with more stringent balanced budget restrictions run more procyclical fiscal policy. We use the diversity in these laws as an instrument for the cyclicality of state government spending. We find modest evidence that more counter-cyclical public expenditure increases a state's average growth rate per capita. Further, our point estimates suggest that a state could increase its annual growth rate by 0.4% by relaxing the "ex-post" balanced budget restriction. This estimated effect is statistically significant at the 10% level in our basic specification, but loses its significance when we control for the initial debt to GDP ratio.

Suggested Citation

  • Ayako Kondo & Justin Svec, 2009. "Fiscal Policy Cyclicality and Growth within the U.S. States," Working Papers 0911, College of the Holy Cross, Department of Economics.
    • Handle: RePEc:hcx:wpaper:0911
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    References listed on IDEAS

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    Cited by:

    1. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 481-513, September.
    2. Jiri Jonas, 2012. "Great Recession and Fiscal Squeeze at U.S. Subnational Government Level," IMF Working Papers 2012/184, International Monetary Fund.
    3. Ellen C. Seljan, 2015. "Ready to Bargain: The Effect of Fiscal Stress on Supermajority Requirements to Raise Taxes," Public Budgeting & Finance, Wiley Blackwell, vol. 35(3), pages 24-43, September.
    4. Schelkle, Waltraud, 2017. "Hamilton’s Paradox Revisited: Alternative lessons from US history," CEPS Papers 12963, Centre for European Policy Studies.

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    More about this item

    Keywords

    growth; fiscal policy; cyclicality;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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