Analyzing state government spending: balanced budget rules or forward-looking decisions?

Christopher Biolsi and H. Youn Kim ()
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H. Youn Kim: Western Kentucky University

International Tax and Public Finance, 2021, vol. 28, issue 4, No 10, 1035-1079

Abstract: Abstract We analyze US state government spending behavior with a general intertemporal model allowing for asymmetry in balanced budget rules in a panel data setting. We find no strong evidence for forward-looking behavior in state spending; balanced budget rules are a significant constraint. States with budget rules imposing lighter restrictions are more likely to exhibit habit formation, while those with stricter rules demonstrate asymmetric responses to revenue changes. Evidence for a precautionary savings motive is limited. Balanced budget requirements trigger substantial pro-cyclical spending, possibly amplifying state economic volatility for states with tight fiscal rules, especially after revenue increases.

Keywords: Balanced budget rules; Euler equation; Habit formation; Precautionary saving; Asymmetric responses (search for similar items in EconPapers)
JEL-codes: E21 H72 H74 Q51 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:28:y:2021:i:4:d:10.1007_s10797-020-09634-1

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DOI: 10.1007/s10797-020-09634-1

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