Spatial Dependence in Models of State Fiscal Policy Convergence

FRB of St. Louis Working Paper No. 2006-001B

30 Pages Posted: 6 Jan 2006

See all articles by Cletus C. Coughlin

Cletus C. Coughlin

Federal Reserve Bank of St. Louis - Research Division

Thomas A. Garrett

Federal Reserve Bank of St. Louis - Research Division

Ruben Hernandez-Murillo

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: June 2006

Abstract

We apply spatial econometric techniques to models of state and local fiscal policy convergence. Total tax revenue and expenditures, as well as broad tax and expenditure categories, of state and local governments in each of the 48 contiguous U.S. states are examined. We extend recent work by Annala (2003) in much the same way that Rey and Montouri (1999) extended the literature dealing with income convergence among U.S. states. Our results indicate that most fiscal policies have been converging and that the growth in overall and broad categories of tax revenue and spending are dependent on the corresponding tax and spending behavior in other states. In addition, total expenditures have been converging faster than output, whereas total tax revenues have been converging slower that output. Our models further demonstrate that expenditure growth in a state is dependent upon expenditure growth in economically and demographically similar states, while output growth and revenue growth in a state are dependent on output growth and revenue growth, respectively, in contiguous states.

Keywords: convergence, state fiscal policy, fiscal policy dependence, spatial econometrics

JEL Classification: C21, H71, H72, R11

Suggested Citation

Coughlin, Cletus C. and Garrett, Thomas A. and Hernandez-Murillo, Ruben, Spatial Dependence in Models of State Fiscal Policy Convergence (June 2006). FRB of St. Louis Working Paper No. 2006-001B. Available at SSRN: https://ssrn.com/abstract=874063 or http://dx.doi.org/10.2139/ssrn.874063

Cletus C. Coughlin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Thomas A. Garrett

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Ruben Hernandez-Murillo

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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