Together or Separately? Issues on the Costs and Benefits of Political and Fiscal Unions

This paper shows that in American states balanced budget rules are effective in enforcing fiscal discipline but they have no costs in terms of increased output variability. More specifically, we show that tighter fiscal rules are associated with larger average surplus and lower cyclical variability of the budget balance. However, the lower flexibility of the budget balance does not affect state output variability. Alberto Alesina Department of Economics Harvard University Cambridge, MA 02138 and NBER Tamim Bayoumi International Monetary Fund 700 19th Street, NW Washington, DC 20431