Working Paper: CEPR ID: DP2286
Authors: Bent E. Sorensen; Lisa Wu; Oved Yosha
Abstract: What are the cyclical properties of US state and local government fiscal policy? The budget surplus of local and, in particular, state governments is procyclical, smoothing disposable income and consumption of state residents. This happens over both short- and medium-term horizons. Procyclical surpluses are the result of strongly procyclical revenues, and weakly procyclical expenditures. The budgets of trust funds and utilities are procyclical. Federal grants are procyclical, exacerbating the cyclical amplitude of state level income movements; although they smooth the idiosyncratic component of shocks to state output. State and local budget surpluses are affected by balanced budget rules at the short- but not at the medium-term horizon. Further, budgets are less procyclical in conservative states.
Keywords: State and local government fiscal policy; Off-budgeting; Political business cycles
JEL Codes: E60; H10; H20; H30; H50; H72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Revenues being strongly procyclical (E32) | Budget surpluses being procyclical (H62) |
| Expenditures being weakly procyclical (H69) | Budget surpluses being procyclical (H62) |
| Balanced budget rules (H61) | Ability to smooth fiscal policies (E62) |
| Federal grants (I28) | Cyclical amplitude of income movements at the state level (E32) |
| Political cycles (E32) | Fiscal behavior (H39) |
| Presence of balanced budget rules (H61) | Procyclicality of budgets (E62) |
| Cyclical response of budget surpluses (H62) | Difference between states with and without stringent balanced budget rules (H72) |