Are US state and local governments consumption smoothers?
Abstract
Purpose
This paper aims to reconcile conflicting findings in the literature regarding the extent of consumption smoothing of sub-federal governments.
Design/methodology/approach
This paper uses a panel of US state and local government data from 1973 to 2000 to find the extent of consumption smoothing among US state and local governments.
Findings
It is found that about 30 percent of spending is determined by permanent resources. Additionally, states with more stringent balanced budget rules are found to smooth more than states with the least stringent balanced budget rules, which do not smooth at all. There is some evidence that liquidity constraints may cause the non-optimal behavior of the states with the least restrictive requirements as they have higher average net debt per capita and face higher risk premia than those with the most stringent rules.
Research limitations/implications
Results differ from research using aggregate US data, where it is found that essentially all changes in state and local government spending are due to changes in current resources. The conflict is attributed to panel vs aggregate data use. Other research finds greater smoothing in Norway, where about 65 percent of local government spending is determined by permanent resources, and Sweden, with at least 90 percent of spending changes due to changes in permanent resources. This conflict may be due to institutional differences. Further research is needed in this area.
Originality/value
This paper fills a gap in the literature on consumption smoothing by considering a panel of US state and local governments.
Keywords
Acknowledgements
JEL classification – D99, H72 The support from the Roger Williams University Foundation for Scholarship and Teaching is gratefully acknowledged. The author thanks an anonymous referee for many helpful comments. The author is responsible for all the errors.
Citation
Cornachione Kula, M. (2014), "Are US state and local governments consumption smoothers?", Journal of Economic Studies, Vol. 41 No. 1, pp. 87-100. https://doi.org/10.1108/JES-12-2012-0171
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited