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Local Fiscal Responses to Procyclical Changes in State Aid

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  • Phuong Nguyen-Hoang
  • Yilin Hou

Abstract

This article examines the asymmetry in local government responses to economic-cycle-based changes of state aid in a framework that distinguishes current outlay from noncurrent expenses and discretionary savings. Employing a panel dataset of Massachusetts municipalities for two economic cycles, we obtain three findings. First, we do not find evidence of property-tax relief during economic booms. Second, discretionary savings may be used to cover noncurrent outlays during booms and to offset spending cuts during recessions. Finally, we find a large (asymmetric) fiscal inducement that may emerge during recessions when state aid cuts coincide with property-tax shortfalls. While these context-specific results may not be easily generalizable, they necessitate further research into the role of local discretionary savings and cash reserves in intergovernmental fiscal relations.

Suggested Citation

  • Phuong Nguyen-Hoang & Yilin Hou, 2014. "Local Fiscal Responses to Procyclical Changes in State Aid," Publius: The Journal of Federalism, Oxford University Press, vol. 44(4), pages 587-608.
  • Handle: RePEc:oup:publus:v:44:y:2014:i:4:p:587-608.
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    File URL: http://hdl.handle.net/10.1093/publius/pjt039
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