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How well are the states of the Eighth Federal Reserve District prepared for the next recession?

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  • Erick Elder
  • Gary A. Wagner

Abstract

Economic downturns often force state policymakers to enact sizable tax increases or spending cuts to close budget shortfalls. In this paper the authors make use of a Markov-switching regression model to empirically describe the expansions and contractions in the states of the Eighth Federal Reserve District. They use the estimated parameters from the switching regressions to form probability distributions of the revenue shortfalls states are likely to encounter in future slowdowns. This allows them to estimate the probability that each state's projected fiscal-year-end balances will be sufficient to offset the fiscal stress from a recession.

Suggested Citation

  • Erick Elder & Gary A. Wagner, 2007. "How well are the states of the Eighth Federal Reserve District prepared for the next recession?," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Nov, pages 75-87.
    • Handle: RePEc:fip:fedlrd:y:2007:i:nov:p:75-87:n:v.3no.2
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    References listed on IDEAS

    as
    1. Wagner, Gary A & Elder, Erick M., 2007. "Revenue Cycles and the Distribution of Shortfalls in U.S. States: Implications for an "Optimal" Rainy Day Fund," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(4), pages 727-742, December.
    2. Ming-Yuan Leon Li & Hsiou-Wei William Lin & Rau Hsiu-hua, 2005. "The performance of the Markov-switching model on business cycle identification revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 513-520.
    3. Theodore M. Crone, 2002. "Consistent economic indexes for the 50 states," Working Papers 02-7, Federal Reserve Bank of Philadelphia.
    4. Michael T. Owyang & Jeremy Piger & Howard J. Wall, 2005. "Business Cycle Phases in U.S. States," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 604-616, November.
    5. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    6. Thomas A. Garrett & Gary A. Wagner, 2004. "State government finances: World War II to the current crises," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 9-25.
    7. Kusko, Andrea L. & Rubin, Laura S., 1993. "Measuring the Aggregate High-Employment Budget for State and Local Governments," National Tax Journal, National Tax Association, vol. 46(4), pages 411-23, December.
    8. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    9. Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May.
    10. Kusko, Andrea L. & Rubin, Laura S., 1993. "Measuring the Aggregate High-Employment Budget for State and Local Governments," National Tax Journal, National Tax Association;National Tax Journal, vol. 46(4), pages 411-423, December.
    11. Gary A. Wagner & Erick M. Elder, 2005. "The Role of Budget Stabilization Funds in Smoothing Government Expenditures over the Business Cycle," Public Finance Review, , vol. 33(4), pages 439-465, July.
    12. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
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