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Macroeconomic Instability and Fiscal Decentralization: An Empirical Analysis

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  • Ahmad Zafarullah Abdul Jalil
  • Mukaramah Harun
  • Siti Hadijah Che Mat
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    Abstract

    The main objective of this paper is to fill a critical gap in the literature by analyzing the effects of decentralization on the macroeconomic stability. A survey of the voluminous literature on decentralization suggests that the question of the links between decentralization and macroeconomic stability has been relatively scantily analyzed. Even though there is still a lot of room for analysis as far as the effects of decentralization on other aspects of the economy are concerned, we believe that it is in this area that a more thorough analyses are mostly called for. Through this paper, we will try to shed more light on the issue notably by looking at other dimension of macroeconomic stability than the ones usually employed in previous studies as well as by examining other factors that might accentuate or diminish the effects of decentralization on macroeconomic stability. Our results found that decentralization appears to lead to a decrease in inflation rate. However, we do not find any correlation between decentralization with the level of fiscal deficit. Our results also show that the impact of decentralization on inflation is conditional on the level of perceived corruption and political institutions.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Prague Economic Papers.

    Volume (Year): 2012 (2012)
    Issue (Month): 2 ()
    Pages: 150-165

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    Handle: RePEc:prg:jnlpep:v:2012:y:2012:i:2:id:416:p:150-165

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    Related research

    Keywords: macroeconomic stability; institutional and political environment; fiscal federalism; decentralization;

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    References

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    1. Arvind Subramanian & Shanker Satyanath, 2004. "What Determines Long-Run Macroeconomic Stability? Democratic Institutions," IMF Working Papers 04/215, International Monetary Fund.
    2. Ahmad, Junaid & Devarajan, Shantayanan & Khemani, Stuti & Shah, Shekhar, 2005. "Decentralization and service delivery," Policy Research Working Paper Series 3603, The World Bank.
    3. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November.
    4. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española, IEF, vol. 179(4), pages 25-49, September.
    5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    6. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    8. King, David & Ma, Yue, 2001. "Fiscal decentralization, central bank independence, and inflation," Economics Letters, Elsevier, vol. 72(1), pages 95-98, July.
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