Empirical Studies in Public Finance and Financial Economics

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This study involves two projects. The first is to investigate the effects of state budgeting procedures on capital and operating expenditures. The object is to examine the issue of whether the level of public spending on capital projects such as highways, schools, etc. is influenced by capital budgeting procedures used by some state governments. Expenditure data by state will be analyzed statistically to determine the effect of capital budgeting on the level and type of public capital investments. The other project is in the area of financial economics and is aimed at discovering what factors may account for the variation of stock prices. Traditional theory and models do not adequately explain why the stock market seems to be becoming more volatile as evidenced by the recent stock market crash. Vector autoregression techniques will be used to analyze price volatility. Particular attention will be paid to the role that news, such announced changes in interest rates or the reporting of trade or budget deficits, may play in affecting market volatility. Whether or not the federal government should adopt the use of a capital budget has been a long standing issue in public finance, which in recent years has come to the forefront because of concerns over deteriorating infrastructure and over the federal budget deficit. It is not clear at all whether the adoption of a dual budget system would affect the level or pattern of federal spending. This project should shed some light on that issue. The research on stock price volatility may identify new sources of that volatility and suggest ways the market may be made less volatile and more efficient for raising investment capital.