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Revenue Cycles and the Distribution of Shortfalls in U.S. States: Implications for an "Optimal" Rainy Day Fund

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  • Wagner, Gary A
  • Elder, Erick M.

Abstract

Slowdowns in economic activity often leave state policymakers facing severe budget shortfalls and the prospects of reducing services. In this paper we apply a Markov switching regression to monthly state–level data to model the distribution of expansions and contractions. This allows us not only to construct distributions of the revenue shortfalls states are likely to confront during recessions, but also to construct savings rate rules that depend on the uncertain duration in both expansions and contractions. Our results have important implications for policymakers who may wish to smooth cyclical fluctuations in the budget via a rainy day fund.

Suggested Citation

  • 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.
    • Handle: RePEc:ntj:journl:v:60:y:2007:i:4:p:727-42
    DOI: 10.17310/ntj.2007.4.03
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    References listed on IDEAS

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    1. Wagner, Gary A., 2004. "The Bond Market and Fiscal Institutions: Have Budget Stabilization Funds Reduced State Borrowing Costs?," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 785-804, December.
    2. 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.
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    Cited by:

    1. Hai (David) Guo & Wen Wang, 2017. "A Spatial Analysis of Florida County Governments' Unreserved General Fund Balances," Public Budgeting & Finance, Wiley Blackwell, vol. 37(3), pages 71-88, September.
    2. 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.
    3. Zhao, Bo, 2016. "Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds," Regional Science and Urban Economics, Elsevier, vol. 61(C), pages 130-152.
    4. Craig, Steven G. & Hemissi, Wided & Mukherjee, Satadru & Sørensen, Bent E., 2016. "How do politicians save? Buffer-stock management of unemployment insurance finance," Journal of Urban Economics, Elsevier, vol. 93(C), pages 18-29.

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