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Dynamic Patterns in State Government Finance

Author

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  • Therese A. Mccarty

    (Union College)

  • Stephen J. Schmidt

    (Union College)

Abstract

The authors estimate vector autoregressions for three categories of state government expenditure: education, highways, and welfare. Each regression contains state expenditure on that category, federal aid to the state in that category, total federal aid to the state, state general revenue, and personal income. The authors calculate impulse response functions for these vector autoregressions to analyze changes in aid and expenditure over time. The authors find that deviations in expenditure and category-specific aid have large and long-lasting effects on future expenditure. Category-specific aid has a much stronger effect than aid, revenue, or income, suggesting a flypaper effect in which aid is spent disproportionately in the category in which it is granted. This effect persists for up to 5 years, suggesting that there are structural dynamic links between category-specific aid and expenditure by states on those categories.

Suggested Citation

  • Therese A. Mccarty & Stephen J. Schmidt, 2001. "Dynamic Patterns in State Government Finance," Public Finance Review, , vol. 29(3), pages 208-222, May.
    • Handle: RePEc:sae:pubfin:v:29:y:2001:i:3:p:208-222
    DOI: 10.1177/109114210102900302
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    References listed on IDEAS

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    1. McCarty, Therese A & Schmidt, Stephen J, 1997. "A Vector-Autoregression Analysis of State-Government Expenditure," American Economic Review, American Economic Association, vol. 87(2), pages 278-282, May.
    2. Holtz-Eakin Douglas & Rosen Harvey S. & Tilly Schuyler, 1994. "Intertemporal Analysis of State and Local Government Spending: Theory and Tests," Journal of Urban Economics, Elsevier, vol. 35(2), pages 159-174, March.
    3. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    4. Jane Leuthold, 1988. "A forecasting model for state expenditures," Public Choice, Springer, vol. 56(1), pages 45-55, January.
    5. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
    6. Payne, James E, 1998. "The Tax-Spend Debate: Time Series Evidence from State Budgets," Public Choice, Springer, vol. 95(3-4), pages 307-320, June.
    7. Dye, Richard F. & McGuire, Therese J., 1992. "Sorting Out State Expenditure Pressures," National Tax Journal, National Tax Association;National Tax Journal, vol. 45(3), pages 315-329, September.
    8. Garand, James C., 1988. "Explaining Government Growth in the U.S. States," American Political Science Review, Cambridge University Press, vol. 82(3), pages 837-849, September.
    9. Dye, Richard F. & McGuire, Therese J., 1992. "Sorting Out State Expenditure Pressures," National Tax Journal, National Tax Association, vol. 45(3), pages 315-29, September.
    10. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
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    Cited by:

    1. Schmidt, Stephen J. & McCarty, Therese A., 2008. "Estimating permanent and transitory income elasticities of education spending from panel data," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2132-2145, October.

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