SEVERITY OF ECONOMIC FLUCTUATIONS UNDER A BALANCED BUDGET AMENDMENT

This paper uses a vector autoregression model to estimate the role of fiscal and monetary policy stabilizers during the last four U.S. recessions. The data show that both types of stabilizers have had a large stabilizing effect. These results imply that adopting a balanced budget rule would increase greatly the severity of future recessions and require the Federal Reserve to respond much more strongly to economic fluctuations than is currently the case. Copyright 1996 Western Economic Association International.