Is state fiscal policy asymmetric over the business cycle?

A number of stabilizers are thought to mute the business cycle. One key stabilizer is federal fiscal policy. The federal budget surplus tends to rise during economic booms and fall in downturns, helping to stabilize consumers’ disposable income and thereby mitigate economic fluctuations. During booms, for example, the budget surplus typically rises because tax revenues rise more than expenditures.> Another stabilizer that has traditionally received less attention is state fiscal policy. Like the federal budget surplus, state government surpluses tend to rise during economic expansions and decline during downturns. Moreover, like the federal budget, state budgets represent large shares of the economy. The stabilizing influence of state fiscal policy, however, may differ across business cycle expansions and downturns – making state fiscal policy asymmetric. For example, state budgets could be more effective at mitigating economic slumps than at muting booms if taxes fall more sharply during a slump than they rise in an expansion of equal magnitude. Asymmetry in fiscal policy could be caused by a number of factors, such as balanced budget rules, which are constitutionally imposed restrictions on a state government’s ability to incur debt.> Sorensen and Yosha examine the business cycle behavior of state fiscal policy to determine whether policy is asymmetric and, if so, to identify the causes. They conclude that state revenue and expenditure display significant asymmetry over the business cycle, with nearly offsetting effects on the budget surplus. As a result, state fiscal policy tends to mute economic booms to roughly the same degree it mitigates slowdowns. The asymmetries in revenue and expenditure appear to be associated with balanced budget rules, although their fundamental causes cannot be clearly identified.Fiscal policy ; Business cycles

Is risk sharing in the United States a regional phenomenon?

Regions within the United States routinely experience economic fluctuations that differ from those of other regions. For example, in the past few years, falling wheat prices have slowed growth in the value of total output in Kansas. Such developments can pose concerns for policymakers because macroeconomic tools like monetary policy affect all regions, not just specific regions. Fortunately, several mechanisms help insulate regional income and consumption from region-specific output fluctuations. Diversification of asset ownership across regions, made possible by national capital markets, smoothes regional income and, in turn, consumption. The federal tax system also helps protect regional income and consumption from region- specific changes in output. Finally, adjustments to saving further insulate consumption from variation in output. In effect, each of these mechanisms mitigates the effect of region-specific economic fluctuations by pooling risks across regions--by providing risk sharing.> Although earlier research has documented the pattern of risk sharing for the United States as a whole, patterns may differ across broad regions of the nation. Eastern states, for example, may benefit more from income smoothing through capital markets due to their proximity to Wall Street. Moreover, geographic distance may affect whether and how risk is shared. For instance, it may be easier for Kansas residents to own property, such as a farm or hotel, in Colorado than in Massachusetts. Similarly, business owners in Kansas are more likely to obtain loans in Missouri than in New York. In this case, geography may affect the ability of risk sharing to mitigate region-specific fluctuations in output. Because geography matters, this article examines whether risk sharing occurs more in some regions than in others and whether risk sharing is greater within large regions of the United States than between regions.> Sorensen and Yosha present the conceptual framework of risk sharing and develop a method for estimating the amount of risk sharing provided by different mechanisms. They report estimates of risk sharing patterns within and across a set of large U.S. regions. These estimates reveal some important regional differences. Moreover, the estimates indicate there is more overall risk sharing within regions than between regions. The risk sharing provided by capital markets and the federal tax system is essentially the same within and across regions, implying that these are nationwide mechanisms. In contrast, risk sharing through saving adjustments is more local, occurring just within regions.Risk

Risk Sharing among OECD and EU Countries: The Role of Capital Gains, Capital Income, Transfers, and Saving

We estimate the amount of income and consumption smoothing (risk sharing) between OECD countries during the period 1970{2003 with a particular focus on EU and EMU countries. Income smoothing from international factor income has increased in the EU and, in particular, the EMU but not in the non-EU OECD since the introduction of the Euro. Consumption smoothing from pro-cyclical government saving has declined in the EMU, but not in the non-EU OECD, since the signing of the Maastricht treaty. We find that when capital gains and losses on international asset positions are considered part of income, the magnitude of capital gains leads to huge amounts of income smoothing and dis-smoothing although, at the time horizons we examine, the capital gains or losses are only weakly reflected in consumption. Understanding the role of capital gains in risk sharing appears to be of first order importance.Government De¯cits, Income Insurance, International Capital Markets, International Integration, Risk Sharing, External Capital Gains

Risk Sharing through Capital Gains

We estimate channels of international risk sharing between European Monetary Union (EMU), European Union, and other OECD countries 1992-2007. We focus on risk sharing through savings, factor income flows, and capital gains. Risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then. Risk sharing from capital gains, at about 6 percent, is higher than risk sharing from factor income flows for European Union countries and OECD countries. Risk sharing from factor income flows is higher for Euro zone countries, at 14 percent, reflecting increased international asset and liability holdings in the Euro area.

Risk sharing and portfolio allocation in EMU

This paper investigates whether risk sharing, measured as income and consumption smoothing, among countries in the EU and the European Economic and Monetary Union (EMU) has increased since the adoption of the euro. We ask: Have the recent increase in foreign equity and debt holdings been associated with more risk sharing? Do certain classes of assets (debt, equity, foreign direct investment) provide relatively more or less risk sharing? Do liabilities provide risk sharing differently from assets? Do investments in EMU countries provide more or less risk sharing per euro invested compared to investments in non-EMU countries? Has increased banking integration improved risk sharing? Due to the short span of years since the introduction of the euro, our results are tentative, but they indicate that the monetary union has facilitated risk sharing, although the level of risk sharing is still much below the level found among U.S. states.Financial integration, Risk sharing, EU, EMU, Portfolio diversification, Banking market integration, Panel data analysis, Demyanyk, Ostergaard, S�rensen

House Prices and Risk Sharing

Homeowners in the Panel Study of Income Dynamics are able to maintain a high level of consumption following job loss (or disability) in periods of rising local house prices while the consumption drop for homeowners who lose their job in times of lower house prices is substantial. These results are consistent with homeowners being able to access wealth gains when housing appreciates as witnessed by their ability to smooth consumption more than renters. A calibrated model of endogenous homeownership and consumption is able to reproduce the patterns in the data quite well and provides an interpretation of the empirical results.job displacement; disability; housing collateral

Where does Capital Flow? A Comparison of U.S. States and EU Countries 1950-2000

We find that the United States in the 1950s and 1960s was characterized by strong "catch-up growth" in the south with capital owing from rich northern states to poorer southern states - consistent with the predictions of the simple neoclassical model. After the 1970s, "catch-up growth" is mainly over in the United States and capital is owing to productive (rich) states. For Europe, we find that capital has been owing from the richer countries to the poorer countries since the 1970s with no signs yet of the "catch-up" phase having run its course, except for the country of Ireland.european capital markets, regional capital flows, institutions, regulations, Kalemli-Ozcan, Sorensen, Turan

Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe

We find that risk sharing in the European Union (EU) has been increasing over the past decade due to increased cross-ownership of assets across countries. Industrial special- ization has also been increasing over the last decade and we conjecture that risk sharing plays an important causal effect by allowing countries to specialize without being subject to higher income risk even though the variability of output may increase. We believe that lower trade barriers may not have played a dominant causal role during this decade be- cause the effect of lower trade barriers has probably already played itself out. We further find that the asymmetry of GDP fluctuations in the EU has declined steeply over the last two decades. This may be due to economic policies becoming more similar as countries were adjusting fiscal policy in order to meet the Maastricht criteria, but a similar result was found for U.S. states so the finding may be due to a different nature of the shocks to the world economy in the 1990s. We expect to see a further rise in risk sharing between EU countries, accompanied by more specialization. However, the resulting increase in GDP asymmetry should be minor and will have small welfare costs because increased risk sharing should lower income (GNP) asymmetry.financial integration, regional specialization, international portfolio diversification, income insurance

Financial Integration within EU Countries: The Role of Institutions, Confidence and Trust

We investigate the degree of financial integration within and between European countries. We construct two measures of de-facto integration across European regions to capture "diversification" and "development" finance in the language of Obstfeld and Taylor (2004). We find evidence that capital market integration within the EU is less than what is implied by theoretical benchmarks and also less than what is found for U.S. states. We ask - why is this the case? Using country-level data for economic institutions, we find that these are not able to explain differences between countries. Using regional data from the World Values Surveys, we investigate the effect of "social capital" on financial integration among European regions. We find regions, where the level of confidence and trust is high, are more financially integrated with each other.

Childhood Determinants of Risk Aversion: The Long Shadow of Compulsory Education

We study the determinants of individual attitudes towards risk and,in particular,why some individuals exhibit extremely high risk aversion. Using data from the Panel Study of Income Dynamics we find that policy induced increases in high school graduation rates lead to significantly fewer individuals being highly risk averse in the next generation. Other significant determinants of risk aversion are age, sex, and parents' risk aversion. We verify that risk aversion matters for economic behavior in that it predicts individuals' volatility of income.schooling reforms; risk attitudes; intergenerational persistence