Working Paper: CEPR ID: DP1029
Authors: Tamim Bayoumi; Barry Eichengreen
Abstract: State budgets in the United States played a significant macroeconomic role in the 1970s and 1980s, and the level of cyclical responsiveness was affected by the severity of statutory and constitutional fiscal restraints. Moving from no fiscal restraints to the most stringent restraints lowered the fiscal offset to income fluctuations by around 40%. Simulations indicate that a reduction in aggregate fiscal stabilizers of this size could lead to a significant increase in the variance of aggregate output.
Keywords: Fiscal Stabilization; Fiscal Restraints
JEL Codes: E62; H61; H74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal restraints (E62) | Cyclical responsiveness of state budgets (E32) |
| Moving from no fiscal restraints to the most stringent restraints (E62) | Fiscal offset to income fluctuations (H31) |
| Reduction in aggregate fiscal stabilizers (E62) | Increase in variance of aggregate output (E23) |
| Stringent fiscal restraints (H60) | Cyclical variation in fiscal balances (E32) |
| State budgets (H72) | Total fiscal offset to income fluctuations (H31) |
| Fiscal restraints in Europe (E62) | National budget stabilization (H69) |