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The Determinants of the Structure of Rainy Day Funds


Isabel Rodríguez-Tejedo teaches in the School of Economics and Business Administration at the University of Navarra, Spain. Her research interests include fi scal federalism, applied microeconomics, and ethics and corruption. Her current research focuses on the confi guration of fi scal institutions, constitutional debt regulations, institutional analysis of social policies, and corruption. Previously, she consulted for the World Bank Group's Development Economics Research Unit and the Agricultural and Rural Development Division.


This article investigates the factors that determine the configuration of budget stabilization funds, also known as rainy day funds, along their two most important dimensions: deposit and withdrawal requirements. These funds are created to accumulate savings in order to reduce the impact of adverse fiscal conditions during downturns. The effectiveness of such funds depends greatly on their institutional structure, and yet most states choose configurations that compromise their efficacy. Using multinomial discrete techniques, and introducing the ordered nature of the requirements in the analysis, the results of this study indicate that political and institutional factors such as the size of the house of the legislature and some strict institutions are associated with weak budget stabilization funds, while economic factors such as the volatility of state tax revenues are associated with stricter funds.