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Transfer payments and state economic activity
Abstract
Transfer payments are a major component of personal income, accounting for almost 17 percent of personal income in 1996 in the U.S. A variety of studies have addressed the relationship between transfer payments and the producing economy at the national level. However. little empirical research about the issue at the state level has been undertaken. In this study, I pursue a state-level approach to investigate the impacts of transfer payments upon the producing economy as represented by nonfarm earnings. Vector error correction models (VECM) are developed for Alaska, Connecticut, Delaware, Missouri, New Mexico, Ohio, South Carolina, and Wyoming. One state from each BEA region is selected based on the highest growth rate of transfer payments as a proportion of personal income. The variables used in the models include: the three-month treasury bill rate, GDP, state farm income, state transfer payments, state dividends, interest, and rent, and state nonfarm earnings. Quarterly observations spanning 1969:1 to 1997:3 are used. Unit root and cointegration tests are conducted prior to estimating the state VECM models. After determining the number of cointegrating vectors, restrictions that reflect the presence of stationary variables in the models are imposed during estimation. Impulse responses based on Cholesky and structural decompositions are obtained through the lag of sixteen quarters. Finally, a bootstrap resampling strategy is used to generate confidence bounds for the impulse responses from the models. Both the Cholesky and structural decomposition results show a mix of positive and negative impacts upon nonfarm earnings from transfer payments across the eight states. According to the empirical confidence bounds, the transfer payment impacts are significant only in South Carolina and Wyoming. Thus, the overall tone of the impact of transfer payments is weak if the confidence bounds are strictly relied upon. As expected, there are some differences in the impulse responses patterns provided by the Cholesky and structural decompositions. However, both approaches generally show that GDP and nonfarm earnings (own shocks) have strong impacts upon state economies.
Subject Area
Economics|Economic theory
Recommended Citation
Huang, Chiung-ju, "Transfer payments and state economic activity" (1998). ETD collection for University of Nebraska-Lincoln. AAI9902962.
https://digitalcommons.unl.edu/dissertations/AAI9902962