Article Fiscal Rules in Recessions: Evidence from the

This study explores the impact of balanced-budget rules on states ’ fiscal pol-icy outcomes and tests whether this impact depends on the political and economic environments in light of the American states ’ experience from 2004 to 2010. The findings suggest that (1) budget rules are more binding in recessions as compared with ‘‘normal’ ’ times; (2) the impact of the rule depends on the political environment, especially on the party identity of the governor; (3) a divided government influences the rule’s impact, particularly when one party controls the governorship and another controls the legislature; and (4) states ’ responses, as measured by total budget cuts, to unexpected revenue shocks (such as unexpected decreases in tax revenue) tend to be larger than states ’ responses to unexpected expenditure shocks