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

Ayako Kondo () and Justin Svec ()

No 911, Working Papers from College of the Holy Cross, Department of Economics

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.

Keywords: growth; fiscal policy; cyclicality (search for similar items in EconPapers)
JEL-codes: E32 E62 H72 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-08
New Economics Papers: this item is included in nep-fdg and nep-mac
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http://web.holycross.edu/RePEc/hcx/HC0911-Kondo-Svec_FiscalCyclicality.pdf (application/pdf)

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Journal Article: Fiscal Policy Cyclicality and Growth within the US States (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hcx:wpaper:0911

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