Do Local Governments Save and Spend Across Budget Cycles? Evidence from North Carolina
32 Pages Posted: 3 Sep 2010
Date Written: August 31, 2010
The fiscal crisis encountered by state-local governments since 2008 has again made prominent the issue of how to better prepare for and stabilize expenditures during recessions. Does the economic stabilization function of government, and its theory, still hold? Previous studies focus on federal and state levels; only a few look at local governments. This article explores whether localities save and spend across the boom-bust cycle; we intend to identify determinants of local government savings and estimate the impact of savings on stabilizing expenditures. Unlike some early evidence that shows counter-cyclical stabilization properties of local unreserved general fund balance, the empirical results of our study on North Carolina counties do not support the stabilization role by localities. This study carries timely and important implications for state/local policy making and financial operations; it also adds to the literature on the stabilization function of government.
Keywords: local financial management, fund balance policy, stabilization function of government
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