Dynamic Effects of Federal Grants on Local Spending

Heng-Fu Zou ()

No 93, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: 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.

Pages: 18 pages
Date: 1995
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Published in Journal of Urban Economics, Volume 36, Issue 1, July 1994, Pages 98-115

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Journal Article: Dynamic Effects of Federal Grants on Local Spending (1994)
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