DP2286 Output Fluctuations and Fiscal Policy: US State and Local Governments 1978-1994

Author(s): Bent E Sørensen , Oved Yosha

Publication Date: November 1999

Keyword(s): Off-Budgeting , Political Business Cycles , State And Local Government Fiscal Policy

JEL(s): H10 , H20 , H30 , H50

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2286.asp

What are the cyclical properties of US state and local government fiscal policy? The budget surplus of local and, in particular, state governments is procyclical, smoothing disposable income and consumption of state residents. This happens over both short- and medium-term horizons. Procyclical surpluses are the result of strongly procyclical revenues, and weakly procyclical expenditures. The budgets of trust funds and utilities are procyclical. Federal grants are procyclical, exacerbating the cyclical amplitude of state level income movements; although they smooth the idiosyncratic component of shocks to state output. State and local budget surpluses are affected by balanced budget rules at the short- but not at the medium-term horizon. Further, budgets are less procyclical in conservative states.