Association for Public Policy Analysis & Management

Early public finance research stemming from Musgrave (1959) assumed that government stabilization occurs through a central government. A long line of research has since shown that state and local governments pursue countercyclical stabilization of budgets through the use of budget stabilization funds and unreserved fund balance. However, research has yet to consider if state and local governments have a stabilizing effect on the local economy. This paper employs a large 30 year panel of all Florida counties to show that subnational government expenditures have an effect on local economic output and financial health. This paper advances theory on subnational government stabilization while also offering two methodological advances. First, it shows how to decompose BEA regional GDP data into an estimate of county level output. Second, it offers a panel VAR analysis, a methodology which has yet to be employed in much of the literature on public finance.