Fiscal Rules, What Does the American Experience Tell Us?

Abstract

We examine the effect of balanced budget rules on budget outcomes in the U.S. from the mid-1980s through the present. Rules at both the federal level and the state level are considered. Given the relatively short duration of the federal rules and corresponding lack of data points, we adopt a narrative approach. Our examination fails to uncover evidence that the statutory rules at the federal level have influenced the size of deficits. The laboratory of the states provides more fertile ground for econometric testing of the influence of balanced budget rules. We test the hypothesis that the strength of a state's balanced budget rule influences its response to unanticipated budget shocks. We conclude that rules at the state-level have had a significant influence on budget outcomes.

Keywords: budget rules, fiscal rules, deficits, balanced budget rules

JEL Classification: H61, H62, H72