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Dynamic Effects of Federal Grants on Local Spending

Listed author(s):
  • Heng-fu Zou

    (Public Economics Division, Policy Research Department, The World Bank)

In a dynamic model of local government spending, this paper examines both long-run and short-run effects of permanent federal grant changes on local public investment and recurrent expenditures. It also utilizes the Judd approach to quantify the short-run effects of temporary (current and future) policy shocks. The interesting, perhaps surprising, findings are: (1) a permanent increase in the matching grants for investment and recurrent expenditures may accelerate or slow down public investment and (2) a current, temporary grant increase stimulates current public investment, but a temporary, future increase in the nonmatching grant reduces current investment and raises current recurrent expenditures.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 93.

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Length: 18 pages
Date of creation: 1995
Publication status: Published in Journal of Urban Economics, Volume 36, Issue 1, July 1994, Pages 98-115
Handle: RePEc:cuf:wpaper:93
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