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Rainy Day Funds October 30, 2014. NTA Session I CounterCyclical Fiscal Policies for States and...
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Transcript of Rainy Day Funds October 30, 2014. NTA Session I CounterCyclical Fiscal Policies for States and...
![Page 1: Rainy Day Funds October 30, 2014. NTA Session I CounterCyclical Fiscal Policies for States and Localities.](https://reader036.fdocuments.in/reader036/viewer/2022081519/56649e8e5503460f94b9118c/html5/thumbnails/1.jpg)
Rainy Day FundsOctober 30, 2014
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NTA Session ICounterCyclical Fiscal Policies for States and
Localities
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NTA Session IIVolatility in States: Are Rainy Day Funds Up to the
Task?
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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
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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
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Alternative Objectives
• Long term saving plan with expenditure smoothing
• Forecaster indemnity fund
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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
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Cycle and Trend
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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
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Cyclical Component of Total State Tax Revenue
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Proposed Saving Plan Won’t Work for Tax Revenue
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Coincident Indicators
• Nonagricultural employment• Unemployment rate• Average hours worked in manufacturing• Real wage and salary disbursements
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Would Budgeting Plan Work for US Economy?
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Rainy Day Funds would need an initial endowment.
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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
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Mean Growth RateState Economy 1992-2013
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Standard Deviation of Growth RateState Economy 1992-2013
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Equity Market Growth and Risk
it i i mt tr r
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State Growth and Volatility Relative to US
, , ,i t i i us t i tr r
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Systematic Risk (R-Squared)State Economy 1992-2013
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Nonsystematic Growth Rate (Alpha)State Economy 1992-2013
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Systematic Volatility (Beta)State Economy 1992-2013
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Adaptive Expectations (Exponential Smoothing)
New Information Observation
Measurement Equation
Transition Equation
New Information+
Estimate of Level+
Estimate of Slope
Revisionof
Level and Slope
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Adaptive Expectations Growth RateState Economy 1992-2013
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Adaptive Expectations Forecasting Error
State Economy 1992-2013
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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.
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Transition Probabilities
FutureExpansion Recession
Current Expansion 0.904 0.096Recession 0.245 0.755
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Ability to Replicate the Business Cycle
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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
![Page 30: Rainy Day Funds October 30, 2014. NTA Session I CounterCyclical Fiscal Policies for States and Localities.](https://reader036.fdocuments.in/reader036/viewer/2022081519/56649e8e5503460f94b9118c/html5/thumbnails/30.jpg)
State Tax Revenue During an Expansion
Out[5]=
min
max
c
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Expenditures and the Budget
Out[10]=
min
max
c
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State Tax Revenues
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State Expenditures
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Surpluses and Deficits
0.5 0.5
Billions of Dollars
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Rainy Day Fund
0.5 0.0 0.5
Surplus Defic it Probability Distribution