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A Framework for Fiscal Policy Coordination and Economic Stability: Countercyclical Transfer for Infrastructure

In: State Government Budget Stabilization

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  • Yilin Hou

    (University of Georgia)

Abstract

This chapter examines the theory behind the design of fiscal transfers; it identifies acyclicality of transfers as a drawback and proposes countercyclical design as an optimal fiscal framework to mitigate cyclical economic fluctuations. It further advocates countercyclical transfers for infrastructure investment, service maintenance, and business tax relief as incentives for states to save in boom years then build from recession into recovery. The framework is set to operate on time-consistent policy rules, as automatic stabilizers with triggers from key economic indicators. It advocates dynamic equity to compensate boom-year donor states ­during recession for more effective macroeconomic stabilization. This chapter focuses on fiscal policy; it does not discuss the political dynamics or details in implementation.

Suggested Citation

  • Yilin Hou, 2013. "A Framework for Fiscal Policy Coordination and Economic Stability: Countercyclical Transfer for Infrastructure," Studies in Public Choice, in: State Government Budget Stabilization, edition 127, chapter 0, pages 275-300, Springer.
    • Handle: RePEc:spr:stpchp:978-1-4614-6061-9_11
    DOI: 10.1007/978-1-4614-6061-9_11
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