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The Role of Budget Stabilization Funds in Smoothing Government Expenditures over the Business Cycle

Author

Listed:
  • Gary A. Wagner

    (Duquesne University)

  • Erick M. Elder

    (University of Arkansas at Little Rock)

Abstract

The economic downturn that began in 2001 resulted in sizable budget shortfalls and arguably the worst fiscal conditions for state governments in decades. The use of savings to stabilize cyclical fluctuations in the budget has been institutionalized in most states in the form of budget stabilization funds. In this article, the authors explore how state expenditure volatility is affected by the existence, size, and structure of stabilization funds using multiple measures of expenditure cyclicality over the period from 1969 to 1999. The results indicate that while most states have not witnessed a reduction in expenditure volatility over the business cycle, states with rule-bound stabilization funds experience significantly less expenditure volatility from utilizing a budget stabilization fund. In fact, the authors find that state expenditures are approximately 20 percent less volatile following the adoption of a rule-bound budget stabilization fund.

Suggested Citation

  • Gary A. Wagner & Erick M. Elder, 2005. "The Role of Budget Stabilization Funds in Smoothing Government Expenditures over the Business Cycle," Public Finance Review, , vol. 33(4), pages 439-465, July.
  • Handle: RePEc:sae:pubfin:v:33:y:2005:i:4:p:439-465
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Asger Lau Andersen & David Dreyer Lassen & Lasse Holbøll Westh Nielsen, 2012. "Late Budgets," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 1-40, November.
      • Asger L. Andersen & David Dreyer Lassen & Lasse Holbøll Westh Nielsen, 2010. "Late Budgets," EPRU Working Paper Series 2010-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    2. Gary A. Wagner & Erick Elder, 2007. "How well are the states of the Eighth Federal Reserve District prepared for the next recession?," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Nov, pages 75-87.
    3. Zhao, Bo, 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.
    4. Zhao, Bo, 2016. "Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds," Regional Science and Urban Economics, Elsevier, vol. 61(C), pages 130-152.
    5. Da, Zhi & Warachka, Mitch & Yun, Hayong, 2015. "Lottery tax windfalls, state-level fiscal policy, and consumption," Economics Letters, Elsevier, vol. 129(C), pages 9-12.
    6. Stuart Landon and Constance Smith, 2015. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    7. Svec Justin & Kondo Ayako, 2012. "Fiscal Policy Cyclicality and Growth within the US States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-35, March.
    8. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Lau, Evan, 2017. "Fiscal sustainability in an emerging market economy: When does public debt turn bad?," Journal of Policy Modeling, Elsevier, vol. 39(1), pages 99-113.
    9. John Merrifield & Barry W. Poulson, 2014. "State Fiscal Policies for Budget Stabilization and Economic Growth: A Dynamic Scoring Analysis," Cato Journal, Cato Journal, Cato Institute, vol. 34(1), pages 47-81, Winter.

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