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The role of fiscal institutions in analysis of fiscal policy

Clemens, Jeffrey and Miran, Stephen (2011): The role of fiscal institutions in analysis of fiscal policy.

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Balanced budget requirements lead to substantial pro-cyclicality in state government spending on infrastructure and public services. Differences in the stringency of states’ budget rules drive the pace at which they must make these adjustments. We show that budget rules (and other fiscal institutions) generate variation in deficit-financed expenditures, which could be ideal for studying fiscal stabilization policy. In contrast, many alternative sources of variation in sub-national fiscal policy implicitly involve “windfall” financing, which will miss the effects of future debt on current consumption and investment behavior. Difficulties with our proposed identification strategy prevent us from cleanly estimating a multiplier.

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