Balanced budgets and business cycles: Evidence from the states

This paper presents evidence that stringent balanced budget requirements en forced in some U.S. states have exacerbated business cycles in those states . The effect is not apparent directly. However, among states where fiscal p olicy may have more macroeconomic consequences (large states), the differen ce in volatility between states with lenient and strict balanced budget rul es is larger (more negative or less positive) than among states where fisca l policy may be less relevant (small states). Two implications are suggeste d: (1) states' fiscal policies have real macroeconomic consequences, and (2 ) strict balanced budget requirements increase business cycle volatility.