RESTRAINING YOURSELF - THE IMPLICATIONS OF FISCAL RULES FOR ECONOMIC-STABILIZATION

State budgets played a significant macroeconomic role in the United St ates during the 1970s and 1980s. Their cyclical responsiveness was aff ected by the severity of statutory and constitutional fiscal restraint s. Moving from no fiscal restraints to stringent restraints lowered th e fiscal offset to income fluctuations by roughly 40 percent. Simulati ons indicate that a reduction in aggregate fiscal stabilizers of this size could lead to a significant increase in the variance of aggregate output.