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Revenue Cycles and Risk-Sharing in Local Governments: An Analysis of State Rainy Day Funds

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  • Erick M. Elder
  • Gary A. Wagner

Abstract

Rainy day funds are one of the primary tools that state and local policymakers employ to dampen the effects of downturns. However, since state business cycles are not perfectly synchronized, theoretically there should be risk-sharing benefits to governments who pool their fiscal resources over the business cycle. In this paper, we explore the issues associated with local government risk-sharing and provide estimates of the potential benefits to state governments. Our results suggest that a national rainy day fund would provide considerable fiscal benefits to state governments at a lower price than self-insuring through their own rainy day funds.

Suggested Citation

  • Erick M. Elder & Gary A. Wagner, 2013. "Revenue Cycles and Risk-Sharing in Local Governments: An Analysis of State Rainy Day Funds," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(4), pages 939-960, December.
    • Handle: RePEc:ntj:journl:v:66:y:2013:i:4:p:939-960
    DOI: 10.17310/ntj.2013.4.08
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    References listed on IDEAS

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    1. Fatas, Antonio & Mihov, Ilian, 2006. "The macroeconomic effects of fiscal rules in the US states," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 101-117, January.
    2. 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.
    3. Yilin Hou & Daniel Smith, 2010. "Do state balanced budget requirements matter? Testing two explanatory frameworks," Public Choice, Springer, vol. 145(1), pages 57-79, October.
    4. Theodore M. Crone & Alan Clayton-Matthews, 2005. "Consistent Economic Indexes for the 50 States," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 593-603, November.
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    Cited by:

    1. Bo Zhao, 2014. "Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds," Working Papers 14-12, Federal Reserve Bank of Boston.
    2. 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.
    3. Sungyoon Lee & Jennifer Dodge & Gang Chen, 2022. "The cost of social vulnerability: an integrative conceptual framework and model for assessing financial risks in natural disaster management," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 114(1), pages 691-712, October.
    4. Alain Cuenca, 2015. "Las entregas a cuenta en el sistema de financiación de las CCAA de régimen común: problemas y opciones de mejora," Policy Papers 2015-10, FEDEA.

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