State government saving over the business cycle

State governments in the United States use savings funds to smooth public finances over the business cycle, and these funds respond to federal policy. State savings are positive and precautionary, insuring against adverse shocks. Federal transfers to states react to national business cycles, leaving states exposed to idiosyncratic risk. State governments faced with idiosyncratic and volatile business cycles save more than less risky states. Results suggest that federal fiscal policy is an influential determinant of state fiscal policy, but does not represent a fiscal union of perfect risk sharing.