Distribution of the Effects of Savings Across Expenditure Types Over the Business Cycle—Evidence from the States

Yilin Hou

Municipal Finance Journal, 2006, vol. 26, issue 4, 1 - 25

Abstract: This paper examines the distribution of the effects of counter-cyclical savings across three major expenditure types over the business cycle. Savings refers to budget stabilization funds (BSFs) and general fund balances (GFBs). The paper uses 1979–1999 panel data of 49 states to test the effects of BSFs and GFBs on general, own-source, and general-fund expenditures of the states during both downturns and upturns. The paper finds a division of work between the two devices. Although the use of BSFs concentrates on own-source spending, BSFs are used to boost general expenditure more than general-fund expenditure in downturns but to increase general-fund expenditure more than general expenditure in upturns. The effects of GFBs, however, are significant only on general-fund expenditure in upturns. This finding suggests that states may have some unstated “strategy” for when and where to use the two types of savings. The specifics of the strategy need to be further explored.

Date: 2006
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