The effect of economic downturns on state budgets: a counterfactual analysis of the great recession

ABSTRACT

I propose a novel method to estimate the effect of recessions on government finances. Using the Great Recession and state budgets as an empirical example, I find large and prolonged budget cuts, but also increases in transfers to populations in need. The proposed method can be easily transferred to other recessions, different spending categories, and local governments receiving state transfers, such as school districts.

KEYWORDS:

• State budgets
• public spending
• recessions
• event study
• counterfactual analysis

JEL CLASSIFICATION:

• H11
• H72
• E32

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ I estimate fully saturated models. The indicators are not estimated separately as they do not vary over time.

² These states include: Alabama, Connecticut, Delaware, Illinois, Louisiana, Massachusetts, Montana, New York, Oklahoma, Tennessee, and West Virginia.