DYNAMIC EFFECTS OF FEDERAL-GRANTS ON LOCAL SPENDING

In a dynamic model of local government spending, this paper examines both long-run and short-run effects of permanent federal grant changes on local public investment and recurrent expenditures. It also utilizes the Judd approach to quantify the short-run effects of temporary (current and future) policy shocks. The interesting, perhaps surprising, findings are: (1) a permanent increase in the matching grants for investment and recurrent expenditures may accelerate or slow down public investment and (2) a current, temporary grant increase stimulates current public investment, but a temporary, future increase in the nonmatching grant reduces current investment and raises current recurrent expenditures. (C) 1994 Academic Press, Inc.