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Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds

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  • Bo Zhao

Abstract

Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, U.S. states have often found themselves exhausting their RDFs and having to raise tax rates or reduce expenditures while still experiencing a downturn. Therefore, how much each state should save in its RDF has become an increasingly important policy question. To address this issue, this paper applies several new methodologies to develop target RDF levels for each U.S. state, based on the estimated short-term revenue component associated with business cycles and also on policymakers' preferences for stable tax rates and expenditures.

Suggested Citation

  • Bo Zhao, 2014. "Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds," Working Papers 14-12, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:14-12
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    References listed on IDEAS

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    2. Christian Gonzalez & Arik Levinson, 2003. "State Rainy Day Funds and the State Budget Crisis 2002-?," Working Papers gueconwpa~03-03-05, Georgetown University, Department of Economics.
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    7. Wagner, Gary A., 2003. "Are state budget stabilization funds only the illusion of savings?: Evidence from stationary panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 213-238.
    8. Erick M. Elder & Gary A. Wagner, 2013. "Revenue Cycles and Risk-Sharing in Local Governments: An Analysis of State Rainy Day Funds," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(4), pages 939-960, December.
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    Cited by:

    1. Jeffrey Clemens & Benedic Ippolito, 2018. "Implications of Medicaid Financing Reform for State Government Budgets," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 135-172.
    2. Timothy J. Goodspeed, 2016. "Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(4), pages 407-420, December.
    3. Yolanda Kodrzycki & Bo Zhao, 2015. "Achieving greater fiscal stability: guidance for the New England states," New England Public Policy Center Research Report 15-2, Federal Reserve Bank of Boston.
    4. Timothy J. Goodspeed, 2022. "Coping with extreme events: On solving decentralized budgetary crises," Working Papers. Collection A: Public economics, governance and decentralization 2210, Universidade de Vigo, GEN - Governance and Economics research Network.

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    More about this item

    Keywords

    rainy day funds; budget stabilization funds; revenue cyclicality;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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