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Dynamic Effects of Federal Grants on Local Spending

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  • Heng-fu Zou

    (Public Economics Division, Policy Research Department, The World Bank)

Abstract

In a dynamic model of local government spending, this paper examines both long-run and short-run effects of permanent federal grant changes on local public investment and recurrent expenditures. It also utilizes the Judd approach to quantify the short-run effects of temporary (current and future) policy shocks. The interesting, perhaps surprising, findings are: (1) a permanent increase in the matching grants for investment and recurrent expenditures may accelerate or slow down public investment and (2) a current, temporary grant increase stimulates current public investment, but a temporary, future increase in the nonmatching grant reduces current investment and raises current recurrent expenditures.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 93.

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Length: 18 pages
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Urban Economics, Volume 36, Issue 1, July 1994, Pages 98-115
Handle: RePEc:cuf:wpaper:93

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Web page: http://cema.cufe.edu.cn/
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Cited by:
  1. Heng-fu Zou, 1994. "Taxes, Federal Grants, Local Public Spending, and Growth," CEMA Working Papers 78, China Economics and Management Academy, Central University of Finance and Economics.
  2. Liutang Gong & Heng-fu Zou, 2001. "Optimal taxation and intergovernmental transfer in a dynamic model with multiple levels of government," CEMA Working Papers 54, China Economics and Management Academy, Central University of Finance and Economics.
  3. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
  4. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
  5. Tao Zhang & Heng-fu Zou, 2012. "Designing Intergovernmental Transfers in Russia: A Simulation Study," CEMA Working Papers 543, China Economics and Management Academy, Central University of Finance and Economics.
  6. Ramiro Gil-Serrate & Julio López-Laborda, 2004. "Modelling tax decentralisation and regional growth," ERSA conference papers ersa04p194, European Regional Science Association.
  7. Liutang Gong & Heng-fu Zou, 2011. "Fiscal Federalism, Public Capital Formation, and Endogenous Growth," CEMA Working Papers 488, China Economics and Management Academy, Central University of Finance and Economics.
  8. Zou, Heng-fu, 2012. "Optimal design of intergovernmental grants in a dynamic model," MPRA Paper 37427, University Library of Munich, Germany.

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