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

Marco Battaglini ()

No 131, 2009 Meeting Papers from Society for Economic Dynamics

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. 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.

Date: 2009
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More papers in 2009 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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