Nathalie Ferrière : nathalie.ferriere[at]sciencespo-aix.fr
Federico Trionfetti : federico.trionfetti[at]univ-amu.fr
U.S. state governments are subject to balanced budget rules, but most have “rainy day funds,” to be used in economic downturns. However, the balances are small relative to fluctuations in revenue. Using data on state finances from the Census Bureau, we find that state governments use other cash accounts which are much larger than the rainy day funds to absorb revenue shocks. We ask if state governments save rationally in the sense that spending and savings of a representative state can be described by a buffer-stock consumer model (Carroll (1992, 1997)) with exogenous revenue. We estimate the parameters of the model using Indirect Inference and find that state governments are risk-averse and impatient, with the estimated parameters similar to those found for consumers.