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Fiscal Adjustment under Centralized Federalism: Empirical Evaluation of the Response to Budgetary Shocks

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  • Jørn Rattsø

Abstract

Fiscal federalism implies a challenge of holding fiscal discipline at the local level. Recent analyses of fiscal adjustment have addressed the design of fiscal and political institutions for the U.S. states, and have shown how tax limits and anti-deficit rules strengthen immediate shock adjustment. Here we extend the evidence to the case of centralized financing in Norway. In this system central government takes a larger responsibility in smoothing decentralized government revenue, but at the same time the localities are more vulnerable to shocks because of their limited room to maneuver. The empirical analysis of responses to budgetary shocks shows that local public investment is the main shock absorber in this system and that investments are procyclical. Local fiscal crisis is avoided, but decentralized government is destabilizing.

Suggested Citation

  • Jørn Rattsø, 2004. "Fiscal Adjustment under Centralized Federalism: Empirical Evaluation of the Response to Budgetary Shocks," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(2), pages 240-261, August.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200408)60:2_240:faucfe_2.0.tx_2-r
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    Citations

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    Cited by:

    1. Lars-Erik Borge & Per Tovmo, 2009. "Myopic or Constrained by Balanced-Budget Rules? The Intertemporal Spending Behavior of Norwegian Local Governments," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 200-219, June.
    2. Richard Jaimes, 2020. "Fiscal adjustments at the local level: evidence from Colombia," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1148-1173, October.
    3. Thushyanthan Baskaran, 2012. "Tax Decentralization and Public Deficits in OECD Countries," Publius: The Journal of Federalism, CSF Associates Inc., vol. 42(4), pages 688-707, October.
    4. Jaimes, Richard, 2016. "Estimating Fiscal Adjustments at the Local Level in Colombia," MPRA Paper 75507, University Library of Munich, Germany.

    More about this item

    Keywords

    fiscal federalism; fiscal discipline; asymmetric shocks;
    All these keywords.

    JEL classification:

    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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