This dissertation provides three distinct perspectives on state rainy day funds. The first empirical chapter explores the factors that influence a state to access their rainy day fund, and a variety of economic, institutional, and political factors to be important. The influence and effects of these factors, however, are contextual, and vary depending on the economic environment and political control. The most important influences on accessing the rainy day fund, however, are economic indicators that are in line with the purpose of state rainy day funds. The second empirical chapter investigates the influence of state rainy day fund deposit and withdrawal rules on where lawmakers place savings. The findings reveal that when states have strict rule configurations that limit legislative discretion, lawmakers avoid placing savings in the formal rainy day funds and opt for informal savings that allow for easier access. The final empirical chapter examines if states save enough to handle their unique economic environments. This chapter replicates Joyce's (2001) study with longitudinal data to gain a better understanding of state savings behavior and economic environments. Additionally, this chapter posits that informal and formal rainy day fund savings are closely linked, and, therefore, scholars need to consider both accounts when determining if states save enough their unique economic environment. Results indicate that under a broader view of state savings behavior and volatility, states are in a much better position than Joyce originally reported. What is more, when we consider both formal and informal savings, states are in a very good position to handle average volatility.

In this dissertation we use Dynamic Stochastic General Equilibrium DSGE) models to explain empirical regularities and policy implications related to (1) durable goods, interest rates and small open economy business cycles, (2) Terms-of-Trade (ToT) and economic fluctuations in small open economies and (3) Budget Stabilization Funds (BSFs) and States’ business cycles. In the first essay, we document that durable spending in developed small open economies constitutes a large share of their total income. Their spending is highly procyclical, sensitive to interest rates, and leads the business cycle. We address these regularities with a RBC model with durable goods. The model successfully replicates the observed business cycle regularities and explains many anomalies not explained in the existing literature. It also emphasizes the role of interest rates uncertainty in explaining the dynamics of the small open economies. The second essay addresses the impacts of the ToT fluctuation on the business cycles of various small open economies. We argue that differences in the degree of durability in domestic production and imports may make these economies more or less sensitive to an identical ToT shock. We found that economies with higher durability usually enjoy more stable business cycle comparing with economies with lower degree of durability. Differences in the persistence of the ToT do affect the dynamic of the external accounts but it cannot explain the observed differences business cycles across small open economies. In the last essay, we evaluate the economic impacts of the Budget Stabilization Funds (BSF) on State-level business cycles. We lay out a State economy RBC model in which a State’s government applies a designated saving rule consistent with households’ optimization. Given the suggested rule we find that the BDFs become a significant automatic stabilizer. It is not only mitigates the procyclicality of the government spending but it also smooth the State’s business cycle.