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Are Fiscal Adjustments less Successful in Decentralized Governments?

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  • Christoph A. Schaltegger
  • Lars P. Feld

Abstract

A common political claim is that decentralized governments undermine policy makers? ability to fight fiscal imbalance. This paper examines how different fiscal institutions influence the likeli-hood of a successful fiscal adjustment. Using a panel of the Swiss cantons from 1981 to 2001, we first analyze the episodes of tight fiscal policy and their macroeconomic consequences. Then, we empirically investigate the determinants of successful long-la¬sting deficit reductions. Contrary to the popular claim, we find that fiscal decentralization increases the probability of a successful fiscal consolidation. In addition, the results point to an important role of intergovernmental grants and the circumstances, in particular the size of fiscal imbalance in the years before the consolida-tion in determining a successful adjustment policy. Furthermore, coalition governments and large parliaments less likely implement successful fiscal stabilizations. Finally, there is some weak evidence that spending cuts are more promising in reaching a long-lasting fiscal adjustment than revenue increases.

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Bibliographic Info

Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2007-06.

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Date of creation: Mar 2007
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Handle: RePEc:cra:wpaper:2007-06

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Keywords: Fiscal Adjustment; Consolidation Policy; Fiscal Decentralization; Fiscal Institutions;

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