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Fiscal Decentralisation, Democratic Institutions and Inflation

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  • Nasir Iqbal

    (Pakistan Institute of Development Economics (PIDE), Islamabad)

Abstract

This study examines the role of democratic institutions in an attempt to explain the relationship between fiscal decentralisation and inflation. The empirical analysis is based on time series data over 1972–2010 for Pakistan using the GMM estimation procedure. Three different measures of fiscal decentralisation are used in order to capture multidimensionality. The major findings of the study suggest that expenditure decentralisation has a negative impact on inflation if accompanied by democratic institutions. Revenue decentralisation, however, has a negative impact on inflation even in the absence of institutions, though institutions accentuate this effect. The role of institutions, therefore, is important in realising the benefits of fiscal decentralisation. Composite decentralisation has a negative and significant impact on inflation. This implies that expenditure decentralisation becomes effective when it is complemented with revenue decentralisation. Intuitively, provincial governments become more responsive when their expenditure needs are met with their own revenues.

Suggested Citation

  • Nasir Iqbal, 2013. "Fiscal Decentralisation, Democratic Institutions and Inflation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 52(3), pages 207-220.
  • Handle: RePEc:pid:journl:v:52:y:2013:i:3:p:207-220
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    File URL: http://www.pide.org.pk/pdf/PDR/2013/Volume3/207-220.pdf
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    Keywords

    Fiscal Decentralisation; Inflation; Institutions; Pakistan;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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