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Fiscal federalism and macroeconomic governance : for better or for worse?

  • Anwar Shah

    (World Bank Group)

In analyzing the institutional environment for macroeconomic management, the author discusses monetary policy, fiscal policy, and subnational borrowing. In analyzing the macroeconomic dimensions of securing an economic union, he discusses the regulatory environment, tax coordination, transfer payments and social insurance, intergovernmental fiscal transfers, and regional equity. Finally, he discusses the challenges of globalization and draws lessons from experience about fiscal reform in developing countries. Among them: 1) Monetary policy is best entrusted to an independent central bank with a mandate for price stability. 2) Fiscal rules accompanied by"gatekeeper"intergovernmental councils or committees provide a useful framework for fiscal discipline and coordination of fiscal policy. 3) The integrity and independence of the financial sector contribute to fiscal prudence in the public sector. 4) To ensure fiscal discipline, governments at all levels must be made to face the financial consequences of their decisions. 5) Societal norms and consensus about the roles of various levels of government and limits to their authority are vital to the success of decentralized decisionmaking. 6) Tax decentralization is a prerequisite for subnational access to credit markets. 7) Higher-level institutional assistance may be needed to finance local capital projects. 8) An internal common market is best preserved by constitutional guarantees. 9) Intergovernmental transfers in developing countries undermine fiscal discipline and accountability while building transfer dependencies that cause a slow economic stagnation of fiscally disadvantaged regions. 10) Periodic review of jurisdictional assignments is essential to realign responsibilities with changing economic and political realities. 11) Finally, and contrary to a common misconception, decentralized fiscal systems offer more potential improved macroeconomic governance than do centralized fiscal systems.

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

Volume (Year): 15 (2014)
Issue (Month): 1 (May)
Pages: 200-240

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Handle: RePEc:cuf:journl:y:2014:v:15:i:1:shah
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  1. Jun Ma, 1995. "Macroeconomic management and intergovernmental relations in China," Policy Research Working Paper Series 1408, The World Bank.
  2. Sheikh, Munir A & Winer, Stanley L, 1977. "Stabilization and Nonfederal Behaviour in an Open Federal State: An Econometric Study of the Fixed Exchange Rate, Canadian Case," Empirical Economics, Springer, vol. 2(3), pages 195-211.
  3. Prud'homme, Remy, 1995. "The Dangers of Decentralization," World Bank Research Observer, World Bank Group, vol. 10(2), pages 201-20, August.
  4. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
  5. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
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