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Journal of Public Administration Research and Theory Advance Access originally published online on April 2, 2007
Journal of Public Administration Research and Theory 2008 18(1):139-159; doi:10.1093/jopart/mum006
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© The Author 2007. Published by Oxford University Press on behalf of the Journal of Public Administration Research and Theory, Inc. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

The Case for Countercyclical Fiscal Capacity

Yilin Hou

University of Georgia

Donald P. Moynihan

University of Wisconsin-Madison

Address correspondence to the author at yihou{at}uga.edu.

A growing literature has sought to demonstrate when and how government capacity links to performance. This article examines those questions in the area of financial management. A basic challenge for state governments is to maintain budgetary stability and program predictability in face of economic downturns. State governments can best meet this challenge by developing what we call countercyclical fiscal capacity (CCFC). We present the concept of CCFC as the creation and use of financial tools that help state governments maintain countercyclical spending and program stability during revenue shocks. We operationalize the concept in terms of fiscal reserves that are used to mitigate emergency-spending cuts and tax increases and analyze the operation of such reserves over a period that includes recessions in 1991 and 2001. We find evidence of the efficacy of CCFC and argue for greater investments in this aspect of government capacity.


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