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Analyzing state government spending: balanced budget rules or forward-looking decisions?

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Listed:
  • Christopher Biolsi

    (Western Kentucky University)

  • H. Youn Kim

    (Western Kentucky University)

Abstract

We analyze US state government spending behavior with a general intertemporal model allowing for asymmetry in balanced budget rules in a panel data setting. We find no strong evidence for forward-looking behavior in state spending; balanced budget rules are a significant constraint. States with budget rules imposing lighter restrictions are more likely to exhibit habit formation, while those with stricter rules demonstrate asymmetric responses to revenue changes. Evidence for a precautionary savings motive is limited. Balanced budget requirements trigger substantial pro-cyclical spending, possibly amplifying state economic volatility for states with tight fiscal rules, especially after revenue increases.

Suggested Citation

  • Christopher Biolsi & H. Youn Kim, 2021. "Analyzing state government spending: balanced budget rules or forward-looking decisions?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 1035-1079, August.
    • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:4:d:10.1007_s10797-020-09634-1
    DOI: 10.1007/s10797-020-09634-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Balanced budget rules; Euler equation; Habit formation; Precautionary saving; Asymmetric responses;
    All these keywords.

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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