Fiscal decentralization and the business cycle: An empirical study of seven federations

Published

Journal Article

Although fiscal policies of central governments sometimes provide modest insurance against regional income shocks, this paper shows that procyclical fiscal policy among provincial governments can easily overwhelm these stabilizing effects. We examine the cyclicality of budget items among provincial governments in seven federations, showing that own-source taxes are generally highly procyclical, and contrary to common wisdom, revenue sharing and discretionary transfers are either acyclical or procyclical. Constituent governments are thus left alone to smooth their own shocks, and we document the extent to which various restraints on borrowing and saving undermine their ability to do so. The resulting procyclicality of provincial fiscal policy is likely to have important implications in a world where demands for countercyclical fiscal policy are increasing but considerable fiscal responsibilities are being devolved to subnational governments. © 2009 Blackwell Publishing Ltd.

Full Text

Duke Authors

Cited Authors

  • Rodden, J; Wibbels, E

Published Date

  • March 1, 2010

Published In

Volume / Issue

  • 22 / 1

Start / End Page

  • 37 - 67

Electronic International Standard Serial Number (EISSN)

  • 1468-0343

International Standard Serial Number (ISSN)

  • 0954-1985

Digital Object Identifier (DOI)

  • 10.1111/j.1468-0343.2009.00350.x

Citation Source

  • Scopus