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State government response to income fluctuations: Consumption, insurance, and capital expenditures

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Author Info

  • Craig, Steven G.
  • Hoang, Edward C.

Abstract

This paper analyzes state government response to changes in the underlying economy with a view to determining whether, and to what extent, state governments respond to economic fluctuations. Specifically, we build impulse response functions from a panel of US states to examine how states cope with changes in economic conditions. We examine current expenditures, as well as Unemployment Insurance, welfare, and capital spending. Further, we examine how both short and long term debt and state government taxes vary with GSP. Our examination of average state government behavior indicates that states respond slowly to changes in the economy, and that they do not utilize some of the institutional features that are purportedly designed to cushion budgetary impacts. Finally, we find that welfare and UI spending follow separate distinct time paths, but not ones seemingly constrained by institutional barriers.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 41 (2011)
Issue (Month): 4 (July)
Pages: 343-351

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Handle: RePEc:eee:regeco:v:41:y:2011:i:4:p:343-351

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Web page: http://www.elsevier.com/locate/regec

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Keywords: State government VAR Economic fluctuations;

References

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  1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  2. Raj Chetty & Emmanuel Saez, 2008. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Working Papers 14403, National Bureau of Economic Research, Inc.
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  4. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  5. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  6. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  7. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  8. repec:fth:harver:1435 is not listed on IDEAS
  9. Dye, Richard F., 2004. "State Revenue Cyclicality," National Tax Journal, National Tax Association, vol. 57(1), pages 133-45, March.
  10. Kristie M. Engemann & Michael T. Owyang & Sarah Zubairy, 2008. "A primer on the empirical identification of government spending shocks," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 117-132.
  11. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
  12. Poterba, James M., 1995. "Capital budgets, borrowing rules, and state capital spending," Journal of Public Economics, Elsevier, vol. 56(2), pages 165-187, February.
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Cited by:
  1. Craig, Steven G. & Hemissi, Wided & Mukherjee, Satadru & Sørensen, Bent E, 2013. "How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance," CEPR Discussion Papers 9520, C.E.P.R. Discussion Papers.
  2. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).

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