rainy day funds october 30, 2014. nta session i countercyclical fiscal policies for states and...
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Rainy Day FundsOctober 30, 2014
NTA Session ICounterCyclical Fiscal Policies for States and
Localities
NTA Session IIVolatility in States: Are Rainy Day Funds Up to the
Task?
Current Utah Proposal
• Budget grows at the long run rate rather than forecasted revenues
• Surplus years accrue into a rainy day fund• Deficit years are financed by the previous surpluses
accumulated in the rainy day fund• Separates the debate of government size from tax policy
Two Year State Budgeting Cycle
First Forecast
Budget Guidancefor Agencies
November
Second Forecast
Initial Budget
February
Third Forecast
November
Fourth Forecast
Supplementals
February
Balanced Budget
June 30
Budgeting Time Line
Alternative Objectives
• Long term saving plan with expenditure smoothing
• Forecaster indemnity fund
Revenue and Expenditure Smoothing
First Forecast
Budget Guidancefor Agencies
November
Second Forecast
Initial Budget
February
Third Forecast
November
Fourth Forecast
Supplementals
February
Balanced Budget
June 30
Budgeting Time Line
Cycle and Trend
Unobserved Components ModelsHodrick-Prescott
1
22
1 11 2t
T T
t t t t t ts
t t
Min y s s s s s
The l values gives the relative importance of smoothing and controls the degree of smoothness. The larger values for l give more smoothness.
Hodrick and Prescott suggest the following values for l.
100 Annual data
1,600 Quarterly data
14,400 Monthly data
Cyclical Component of Total State Tax Revenue
Proposed Saving Plan Won’t Work for Tax Revenue
Coincident Indicators
• Nonagricultural employment• Unemployment rate• Average hours worked in manufacturing• Real wage and salary disbursements
Would Budgeting Plan Work for US Economy?
Rainy Day Funds would need an initial endowment.
Probability Distributions of State Growth Rates
• Absolute• Location: Mean and median• Scale: Standard deviation and interquartile range• Symmetry: Skewness• Outliers: Kurtosis
• Relative• Inherent Growth Rate• Cyclical Growth Volatility• Systematic and Unsystematic Risk• Standard Error of Regression
• Dynamic• Growth• Volatility
• Switching Regression• Probability of Staying in Expansion• Probability of Staying in Recession
Mean Growth RateState Economy 1992-2013
Standard Deviation of Growth RateState Economy 1992-2013
Equity Market Growth and Risk
it i i mt tr r
State Growth and Volatility Relative to US
, , ,i t i i us t i tr r
Systematic Risk (R-Squared)State Economy 1992-2013
Nonsystematic Growth Rate (Alpha)State Economy 1992-2013
Systematic Volatility (Beta)State Economy 1992-2013
Adaptive Expectations (Exponential Smoothing)
New Information Observation
Measurement Equation
Transition Equation
New Information+
Estimate of Level+
Estimate of Slope
Revisionof
Level and Slope
Adaptive Expectations Growth RateState Economy 1992-2013
Adaptive Expectations Forecasting Error
State Economy 1992-2013
Switching Regression
The switching model assumes that there is a different regression model associated with each regime. We assume that we have regressors then the conditional mean of is given by
𝜇𝑡 (𝑚)=𝑋 ′𝑡 𝛽𝑚+𝑍 ′
𝑡𝛾
where are vectors of coefficients. The coefficients associated with are regime invariant.
Transition Probabilities
FutureExpansion Recession
Current Expansion 0.904 0.096Recession 0.245 0.755
Ability to Replicate the Business Cycle
Revenue and Expenditure Smoothing
First Forecast
Budget Guidancefor Agencies
November
Second Forecast
Initial Budget
February
Third Forecast
November
Fourth Forecast
Supplementals
February
Balanced Budget
June 30
Budgeting Time Line
State Tax Revenue During an Expansion
Out[5]=
min
max
c
Expenditures and the Budget
Out[10]=
min
max
c
State Tax Revenues
State Expenditures
Surpluses and Deficits
0.5 0.5
Billions of Dollars
Rainy Day Fund
0.5 0.0 0.5
Surplus Defic it Probability Distribution