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Fiscal Decentralization, Macrostability And Growth

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  • Jorge Martínez-Vázquez

    ()
    (Georgia State University)

  • Robert M. McNab

    ()
    (Defense Resources Management Institute and Naval Postgraduate School)

Abstract

This paper examines how fiscal decentralization may influence economic growth. Previous research on this question has primarily focused on the direct relationship between decentralization and growth. In this paper, we also incorporate the potential indirect influence of decentralization on growth through its impact on macroeconomic stability. We build an augmented neoclassical model of economic growth that allows for both the direct and indirect effects of fiscal decentralization on economic growth. Using panel data, we find that decentralization appears to reduce the rate of inflation in the sample countries, does not appear to directly influence economic growth, and has an indirect, positive effect on growth through its positive influence on macroeconomic stability. An important contribution of the paper is to identify the role of the indirect effects of fiscal decentralization on economic growth.

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Paper provided by Instituto de Estudios Fiscales in its series Working Papers with number 11-03 Classification-JEL : E62, H77, O20. O40..

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Handle: RePEc:hpe:wpaper:y:2003:i:11

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Keywords: Fiscal Decentralization; Economic Growth; Macroeconomic Stability.;

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References

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  1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  2. de la Fuente, Angel & Doménech, Rafael, 2000. "Human Capital In Growth Regressions: How Much Difference Does Data Quality Make?," CEPR Discussion Papers 2466, C.E.P.R. Discussion Papers.
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  7. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
  8. Ernesto H. Stein, 1998. "Fiscal Decentralization and Government Size in Latin America," Research Department Publications 4112, Inter-American Development Bank, Research Department.
  9. Philip R. Gerson, 1998. "The Impact of Fiscal Policy Variableson Output Growth," IMF Working Papers 98/1, International Monetary Fund.
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  16. Ulrich Thießen, 2000. "Fiscal Federalism in Western European and Selected Other Countries: Centralization or Decentralization? What Is Better for Economic Growth?," Discussion Papers of DIW Berlin 224, DIW Berlin, German Institute for Economic Research.
  17. Robalino, David A. & Picazo, Oscar F. & Voetberg, Albertus, 2001. "Does fiscal decentralization improve health outcomes? - evidence from a cross-country analysis," Policy Research Working Paper Series 2565, The World Bank.
  18. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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Cited by:
  1. Iqbal, Nasir & Nawaz, Saima, 2010. "Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan," MPRA Paper 27184, University Library of Munich, Germany.
  2. Asatryan, Zareh & Feld, Lars P., 2013. "Revisiting the link between growth and federalism: A Bayesian model averaging approach," ZEW Discussion Papers 13-049, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Bilin Neyapti & Zafer Akin & Zeynep B. Cevik, 2011. "Does Fiscal Decentralization Promote Fiscal Discipline?," Departmental Working Papers 1101, Bilkent University, Department of Economics.
  4. Neyapti, Bilin, 2013. "Fiscal decentralization, fiscal rules and fiscal discipline," Economics Letters, Elsevier, vol. 121(3), pages 528-532.
  5. Jorge Martinez-Vazquez & Robert McNab, 2001. "Fiscal Decentralization and Economic Growth," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0101, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Philip Bodman & Kelly-Ana Heaton & Andrew Hodge, . "Fiscal Decentralisation and Economic Growth: A Bayesian Model Averaging Approach," MRG Discussion Paper Series 3509, School of Economics, University of Queensland, Australia.
  7. Andreas Kyriacou & Oriol Roca sagalés, 2009. "Fiscal descentralization and the quality of government: evidence from panel data," Hacienda Pública Española, IEF, vol. 189(2), pages 131-155, June.
  8. Ramiro Gil-Serrate & Julio López-Laborda, 2004. "Modelling tax decentralisation and regional growth," ERSA conference papers ersa04p194, European Regional Science Association.
  9. Philip Bodman & Harry Campbell & Kelly-Ana Heaton & Andrew Hodge, . "Fiscal Decentralisation, Macroeconomic Conditions and Economic Growth in Australia," MRG Discussion Paper Series 2609, School of Economics, University of Queensland, Australia.
  10. Neyapti, Bilin, 2010. "Fiscal decentralization and deficits: International evidence," European Journal of Political Economy, Elsevier, vol. 26(2), pages 155-166, June.
  11. Ahmad Zafarullah Abdul Jalil & Mukaramah Harun & Siti Hadijah Che Mat, 2012. "Macroeconomic Instability and Fiscal Decentralization: An Empirical Analysis," Prague Economic Papers, University of Economics, Prague, vol. 2012(2), pages 150-165.
  12. Bilin Neyapti & Zeynep Burcu Bulut-Cevik, 2011. "Fiscal Decentralization, Redistribution and Growth," Koç University-TUSIAD Economic Research Forum Working Papers 1114, Koc University-TUSIAD Economic Research Forum.
  13. ESTEBAN, Sonia & DE FRUTOS, Pablo & PRIETO; Maria Jose, 2008. "Fiscal Decentralization And Economic Growth. Empiric Evidence From A Regional Perspective," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 8(1), pages 29-58.
  14. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.

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