Do state balanced budget requirements matter? Testing two explanatory frameworks

Hou, Yilin; Smith, Daniel L.

doi:10.1007/s11127-009-9528-6

Cited by 58 publications

(49 citation statements)

References 18 publications

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“…14 Note that there are numerous other empirical studies that attempted to explain fiscal balance and its components at the state level based on a set of economic, demographic, and political and fiscal institutional determinants. They include studies by Alt and Lowry (1994), Poterba (1994), Bohn and Inman (1996), Garand and Kapeluck (2004), Primo (2006), and Hou and Smith (2010). One common denominator of these studies is that they do not (directly) test for sustainability.…”

Section: Against Thismentioning

confidence: 99%

Bohn's Test of Fiscal Sustainability of the American State Governments

Mahdavi

2014

Southern Economic Journal

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The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model‐based approach proposed by to test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio (s) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response of s is also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own‐revenue” and “no‐deficit‐carryover” provisions in particular.

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Section: Against Thismentioning

confidence: 99%

Bohn's Test of Fiscal Sustainability of the American State Governments

Mahdavi

2014

Southern Economic Journal

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“…Many studies have examined the operation of fiscal rules in U.S. states, some of which have employed fiscal rules since the 1800s. These studies typically focus on a specific type of rule -a balanced budget rule -and emphasize the technical and political characteristics of various forms of balanced budget rules and the effect of these on the size and persistence of state budget deficits (Poterba, 1995;Bohn and Inman, 1996;Hou and Smith, 2010;Smith and Hou, 2013). In Europe, concern about debt growth in the euro area has led to a number of studies on the efficacy of fiscal rules (Brück and Zwiener, 2006;Hauptmeier et al, 2011;Maltritz and Wuste, 2015;Grembi et al, 2016).…”

Section: Introductionmentioning

confidence: 99%

Does the design of a fiscal rule matter for welfare?

Landon

Smith

2017

Economic Modelling

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This study uses Monte Carlo methods to examine the impact on welfare of several types of commonly used fiscal rules. The simulations employ an expected intertemporal welfare function and the parameters from a three-variable structural VAR estimated using data for sixteen European countries. The VAR captures the potential interaction effects between output, government spending and revenue. We find welfare gains from many, but not all, of the fiscal rules. The best rules target a zero structural deficit and cause government spending volatility to fall by about one third. However, a simple rule, where government expenditure is set equal to a one-period ahead forecast of revenue, performs almost as well. In particular, this simple rule yields a welfare gain and a reduction in volatility similar to that of the more complicated zero structural deficit rule adopted by Switzerland and several other countries. Balanced budget rules perform less well than rules that target the structural deficit. A rule that keeps real per capita government spending equal to a constant-a type of rule adopted by some U.S. states-yields relatively low welfare and often leads to significant debt accumulation. These results highlight the importance of the appropriate design of a fiscal rule.

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“…More stringent BBRs are associated with lower debt, improved credit ratings, and more rapid fiscal adjustment to exogenous shocks (Rose, 2010). A no-carryover deficit rule is described as a strict balanced budget rule because it does not allow state governments to carry over a deficit into the next fiscal year (Hou & Smith, 2010;Mahdavi & Westerlund, 2011).…”

Section: Institutional Constraintsmentioning

confidence: 99%

When Would a Democratic Governor Increase Social Welfare Funding? The Joint Moderation of a State's Economy and a Governor's Budgetary Authority

Swanson

2020

Review of Policy Research

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The partisanship of a policy maker is often noted as correlated with a state government's support for social welfare. However, less attention has been paid to how a governor is able to steer the budget in a manner that reflects her political views. This study assesses how changes in the economy and level of budgetary authority of the governor can jointly condition the effect of a governor's partisanship on the change in social welfare spending. Using the panel data for 49 U.S. states from 1987 to 2014, we examine whether budgetary authority allows governors to respond to an economic contraction in the expected partisan manner. Using a three-way interaction model, we found that Democratic governors are more likely to increase social welfare funding when the economy contracts, particularly when she has high budgetary authority relative to non-Democratic counterparts. The results highlight how the state of the economy and institutional constraints jointly condition the budget process.

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Do state balanced budget requirements matter? Testing two explanatory frameworks

Abstract: Budgeting, Institutions, Fiscal policy, Balanced budget requirements, H7, H71, H72,

Cited by 58 publications

References 18 publications

Bohn's Test of Fiscal Sustainability of the American State Governments

Bohn's Test of Fiscal Sustainability of the American State Governments

Does the design of a fiscal rule matter for welfare?

When Would a Democratic Governor Increase Social Welfare Funding? The Joint Moderation of a State's Economy and a Governor's Budgetary Authority

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