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Intertemporal analysis of state and local government spending: theory and tests

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  • Douglas Holtz-Eakin
  • Harvey S. Rosen

Abstract

Do state and local governments smooth their consumption spending across years, or is their spending driven mainly by contemporaneous changes in resources? We design a test to determine which view of state and local spending is more consistent with the data. We find that state and local spending is determined primarily by current (as opposed to permanent) resources. That is, despite their apparent ability to skirt balanced budget laws, states and localities do not typically smooth their expenditures over time.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 89-4.

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Date of creation: 1989
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Handle: RePEc:fip:fedpwp:89-4

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Keywords: Expenditures; Public ; Municipal finance ; State finance;

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References

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  1. Charles R. Hulten & Robert M. Schwab, 1988. "Income Originating in the State and Local Sector," NBER Chapters, in: Fiscal Federalism: Quantitative Studies, pages 215-254 National Bureau of Economic Research, Inc.
  2. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
  3. Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-36, February.
  4. Poterba, J.M. & Rotemberg, J.J., 1989. "Inflation And Taxation With Optimizing Governments," Working papers 521, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Michael J. Boskin & Marc S. Robinson & Alan M. Huber, 1987. "New Estimates of State and Local Government Tangible Capital and Net Investment," NBER Working Papers 2131, National Bureau of Economic Research, Inc.
  6. N. Gregory Mankiw, 1987. "The Optimal Collection of Seigniorage: Theory and Evidence," NBER Working Papers 2270, National Bureau of Economic Research, Inc.
  7. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, Econometric Society, vol. 54(2), pages 249-73, March.
  8. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  9. Douglas Holtz-Eakin & Harvey S. Rosen, 1989. "Municipal Construction Spending: An Empirical Examination," NBER Working Papers 2989, National Bureau of Economic Research, Inc.
  10. Mieszkowski, Peter & Zodrow, George R, 1989. "Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes on Land Rents, and Property Taxes," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1098-1146, September.
  11. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
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Citations

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Cited by:
  1. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regime," Working Paper Series, Center for Fiscal Studies 2013:12, Uppsala University, Department of Economics.
  2. Antti Moisio, 2001. "On Local Government Spending and Taxation Behaviour - effect of population size and economic condition," Discussion Papers 257, Government Institute for Economic Research Finland (VATT).
  3. Yakovlev, Pavel & Tosun, Mehmet S. & Lewis, William P., 2012. "Legislative Term Limits and State Aid to Local Governments," IZA Discussion Papers 6456, Institute for the Study of Labor (IZA).
  4. Winer, Stanley L. & Ferris, J. Stephen, 2008. "Searching for Keynesianism," European Journal of Political Economy, Elsevier, vol. 24(2), pages 294-316, June.
  5. Carlino, Gerald A. & Inman, Robert P., 2014. "Macro fiscal policy in economic unions: states as agents," Working Papers 14-20, Federal Reserve Bank of Philadelphia.
  6. Borge, L.E. & Dahleberg, M. & Tovmo, P., 2001. "The Intertemporal Spending Behavior of Local Governments : A Comparative Analysis of the Scandinavian Countries," Papers, Uppsala - Working Paper Series 2001:10, Uppsala - Working Paper Series.
  7. Lars-Erik Borge & Per Tovmo, 2007. "Myopic or constrained by balanced-budget-rules? The intertemporal spending behavior of Norwegian local governments," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 8807, Department of Economics, Norwegian University of Science and Technology.
  8. Stanley L. Winer & J Stephen Ferris, 2003. "Searching for Keynes: An Essay on the Political Economy of Fiscal Policy, with Application to Canada, 1870-2000 - revised version," CESifo Working Paper Series 1016, CESifo Group Munich.
  9. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regim," Working Paper Series, Uppsala University, Department of Economics 2013:19, Uppsala University, Department of Economics.
  10. Antti Moisio, 2002. "Essays on Finnish Municipal Finance and Intergovernmental Grants," Research Reports 93, Government Institute for Economic Research Finland (VATT).
  11. Dahlberg, Matz & Lindstrom, Tomas, 1998. "Are Local Governments Governed by Forward Looking Decision Makers?: An Investigation of Spending Patterns in Swedish Municipalities," Journal of Urban Economics, Elsevier, vol. 44(2), pages 254-271, September.
  12. Aronsson, Thomas, 2004. "Social Accounting and the Public Sector," Umeå Economic Studies 644, Umeå University, Department of Economics.
  13. Abdul Jalil, Ahmad Zafarullah & Abdul Karim, Noor Al-Huda, 2008. "Constraining the spending behavior of subnational governments through borrowing limitation: The case of Malaysia," MPRA Paper 25234, University Library of Munich, Germany.

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