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The Macroeconomic Impact of Decentralized Spending and Deficits: International Evidence

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  • Francesca Fornasari

    (The World Bank)

  • Steven B. Webb

    (The World Bank)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced School, Wuhan University
    The World Bank)

Abstract

The main macroeconomic questions about decentralization are whether it has led to an overall expansion of the public sector or to unsustainable fiscal deficits. In the long term, subnational spending contributes to a larger overall government sector, but steady subnational deficits do not affect the average level of central government deficits, according to our economic analysis of 32 industrial and developing countries, 1980-94. Increases of subnational spending and deficits, however, lead to increases in spending and deficits at the national level. The relationships are strong economically as well as significant statistically. We can reject the hypothesis that increases of transfers between central and subnational governments are usually determined exogenously by the center.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 1 (2000)
Issue (Month): 2 (November)
Pages: 403-433

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Handle: RePEc:cuf:journl:y:2000:v:1:i:2:p:403-433

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Keywords: Decentralization; Public spending; Deficits;

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Cited by:
  1. Baskaran, Thushyanthan, 2011. "Tax decentralization and public deficits in OECD countries," MPRA Paper 35141, University Library of Munich, Germany.
  2. Baskaran, Thushyanthan, 2010. "On the Link Between Fiscal Decentralization and Public Debt in OECD Countries," MPRA Paper 21599, University Library of Munich, Germany.
  3. Abdul Jalil, Ahmad Zafarullah & Abdul Karim, Noor Al-Huda, 2008. "Constraining the spending behavior of subnational governments through borrowing limitation: The case of Malaysia," MPRA Paper 25234, University Library of Munich, Germany.
  4. Catriona Purfield, 2004. "The Decentralization Dilemma in India," IMF Working Papers, International Monetary Fund 04/32, International Monetary Fund.
  5. Jorge Martinez-Vazquez & Mark Rider, 2005. "Fiscal Decentralization and Economic Growth: A Comparative Study of China and India," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0519, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Iqbal, Nasir & Nawaz, Saima, 2010. "Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan," MPRA Paper 27184, University Library of Munich, Germany.
  7. Schaltegger, Christoph A. & Feld, Lars P., 2009. "Are fiscal adjustments less successful in decentralized governments?," European Journal of Political Economy, Elsevier, Elsevier, vol. 25(1), pages 115-123, March.
  8. Jing Jin & Chunli Shen & Heng-fu Zou, 2012. "Fiscal Decentralization and Peasants' Financial Burden in China," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 13(1), pages 53-90, May.
  9. Juncheng Feng & Rui Hao & Yang Li & Kezhong Zhang, 2012. "The Effect of Leadership Transition on Government Expenditure: Evidence from China," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 13(1), pages 91-112, May.
  10. Wang, Zhiguo & Ma, Liang, 2012. "New Development of Fiscal Decentralization in China," MPRA Paper 36918, University Library of Munich, Germany.
  11. Eyraud, Luc & Lusinyan, Lusine, 2013. "Vertical fiscal imbalances and fiscal performance in advanced economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(5), pages 571-587.
  12. Zhiguo Wang & Liang Ma, 2014. "Fiscal Decentralization in China: A Literature Review," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 15(1), pages 51-65, May.
  13. Eichler, Stefan & Hofmann, Michael, 2013. "Sovereign default risk and decentralization: Evidence for emerging markets," European Journal of Political Economy, Elsevier, Elsevier, vol. 32(C), pages 113-134.
  14. Luc Eyraud & Marialuz Moreno Badia, 2013. "Too Small to Fail? Subnational Spending Pressures in Europe," IMF Working Papers, International Monetary Fund 13/46, International Monetary Fund.
  15. Oto-Peralías, Daniel & Romero-Ávila, Diego & Usabiaga, Carlos, 2013. "Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?," European Journal of Political Economy, Elsevier, Elsevier, vol. 32(C), pages 205-231.

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