Do governments satisfy an intertemporal budget constraint? This paper uses a panel of U.S. state data from 1978-1998 to empirically investigate whether primary surpluses respond to rising debt/GDP ratios. Instead of relying solely on the time-series characteristics of various data series, the paper focuses on the response of primary surpluses when cyclical fluctuations in output and government spending are explicitly considered. Results suggest no surplus response to the accumulation of debt, whether or not cyclical fluctuations are controlled for, in contrast to similar studies done using U.S. federal government data.
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.
