DYNAMIC EFFECTS OF FEDERAL-GRANTS ON LOCAL SPENDING

In a dynamic model of local government spending, this paper examines b oth long-run and short-run effects of permanent federal grant changes on local public investment and recurrent expenditures. It also utilize s the Judd approach to quantify the short-run effects of temporary (cu rrent and future) policy shocks. The interesting, perhaps surprising, findings are: (1) a permanent increase in the matching grants for inve stment and recurrent expenditures may accelerate or slow down public i nvestment and (2) a current, temporary grant increase stimulates curre nt public investment, but a temporary, future increase in the nonmatch ing grant reduces current investment and raises current recurrent expe nditures. (C) 1994 Academic Press, Inc.