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State Rainy Day Funds and Government General Fund Expenditures: Revisiting the Stabilization Effect

Wenchi Wei and Dwight V. Denison

Public Finance Review, 2019, vol. 47, issue 3, 465-492

Abstract: This study explores the stabilization effect of state rainy day funds (RDFs) on government general fund expenditures (GFEs). We discuss and explicitly illustrate the concept of stabilization effect. Moreover, we utilize the current year’s actual RDF usage as the explanatory variable of interest rather than the previous year’s RDF balance, which most existing studies focus on. A panel data set of states for fiscal years 1998 to 2014 is used in the empirical analysis. Due to the pro-cyclicality of the defined GFE gap and the countercyclicality of RDF usage, their positive correlation revealed in the empirical results demonstrates that the actual RDF usage helps to stabilize state government GFEs in both economic recessions and expansions. We also verify that the previous year’s RDF balance, when interacted with RDF deposit and withdrawal rules, can influence government GFEs, thus demonstrating the importance of RDF rules.

Keywords: rainy day funds; general fund expenditures; stabilization effect; RDF usage; RDF balance (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:47:y:2019:i:3:p:465-492

DOI: 10.1177/1091142118819991

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