State fiscal reserves: Supplementation and substitution over economic boom and bust years

• Published in: Public budgeting & finance 2022-03, Vol.42 (1), p.98-118
• Main Authors: Buerger, Christian, Reitano, Vincent, Sorrentino, Ciana
• Format: Article
• Language: English
• Subjects: Budgets; COVID-19; Economic stabilization; Money; Rules; State budgets; Time periods
• ISSN: 0275-1100; 1540-5850
• DOI: 10.1111/pbaf.12311

During the Great Recession and the start of the COVID‐19 pandemic, practitioners and scholars alike looked to fiscal reserves as a means to overcome fiscal pressure on state budgets. This study builds on the literature exploring the association between budget stabilization funds and unassigned and unreserved balances (UUBs) during economic booms and busts and under different institutional settings. We find that BSFs supplement UUBs during economic booms and substitute for them during economic busts. Institutional rules strongly influence the relationship between both saving instruments. Applications for practice We find that budget stabilization funds supplement unassigned and unreserved balances during times of economic prosperity and substitute them during economic declines. We provide evidence that strict deposit and withdrawal rules enhance the relationship between the business cycle and savings. Strict caps on budget stabilization funds decrease supplementation effects. We introduce replenishment rules to the study of budget stabilization funds. These rules lead to strong supplementation effects after money has been transferred out of the stabilization fund, but decrease supplementation effects during all other time periods.