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Federal Reserve Bank of Boston
Working Papers
Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds
Bo Zhao
Abstract

Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, U.S. states have often found themselves exhausting their RDFs and having to raise tax rates or reduce expenditures while still experiencing a downturn. Therefore, how much each state should save in its RDF has become an increasingly important policy question. To address this issue, this paper applies several new methodologies to develop target RDF levels for each U.S. state, based on the estimated short-term revenue component associated with business cycles and also on policymakers' preferences for stable tax rates and expenditures.


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Bo Zhao, Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds, Federal Reserve Bank of Boston, Working Papers 14-12, 01 Oct 2014.
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Keywords: rainy day funds; budget stabilization funds; revenue cyclicality
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