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On the Case for a Balanced Budget Amendment to the U.S. Constitution

Marina Azzimonti (), Marco Battaglini () and Stephen Coate ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper uses the political economy model of Battaglini and Coate (2008) to analyze the impact of a balanced budget rule that requires that legislators do not run deficits. It considers both a strict rule which cannot be circumvented and a rule that can be overridden by a super-majority of legislators. A strict rule leads to a gradual but substantial reduction in the level of public debt. In the short run, citizens will be worse off as public spending is reduced and taxes are raised to bring down debt. In the long run, the benefits of a lower debt burden must be weighed against the costs of greater volatility in taxes and less responsive public good provision. To quantify these effects, the model is calibrated to the U.S. economy using data from 1940-2005. While the long run net benefits are positive, they are outweighed by the short run costs of debt reduction. A rule with a super-majority override has no effect on citizen welfare or fiscal policy.

Keywords: Balanced Budget Amendment; Political Economy; Markov Equilibrium; Bargaining (search for similar items in EconPapers)
JEL-codes: H21 C70 D60 E60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pol
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Working Paper: On the Case for a Balanced Budget Amendment to the U.S. Constitution (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:25935

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