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Federal Reserve Bank of Kansas City
Research Working Paper
Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994
Bent E. Sorensen
Lisa Wu
Oved Yosha
Abstract

What are the cyclical properties of U.S. 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.


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Bent E. Sorensen & Lisa Wu & Oved Yosha, Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994, Federal Reserve Bank of Kansas City, Research Working Paper 99-05, 1999.
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Keywords: Fiscal policy ; Local government ; State finance ; Local finance
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