Is there an alternative to fiscal rules in the enforcement of fiscal discipline among members of a

monetary union? Reforms in 2005 weakened the Stability and Growth Pact in Europe, providing

evidence that policy rules may ultimately never bind, and suggesting an alternative to a rules

based approach is necessary. According to the credit market discipline hypothesis, the market is a

viable alternative: greater government spending and borrowing will increase interest rates, which

will exert pressure on governments to reduce borrowing and spending. This paper uses U.S. state

data to empirically investigate government consumption responses to changes in interest rates.