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Macroeconomic Instability and Fiscal Decentralization: An Empirical Analysis

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  • Ahmad Zafarullah Abdul Jalil
  • Mukaramah Harun
  • Siti Hadijah Che Mat

Abstract

The main objective of this paper is to fill a critical gap in the literature by analyzing the effects of decentralization on the macroeconomic stability. A survey of the voluminous literature on decentralization suggests that the question of the links between decentralization and macroeconomic stability has been relatively scantily analyzed. Even though there is still a lot of room for analysis as far as the effects of decentralization on other aspects of the economy are concerned, we believe that it is in this area that a more thorough analyses are mostly called for. Through this paper, we will try to shed more light on the issue notably by looking at other dimension of macroeconomic stability than the ones usually employed in previous studies as well as by examining other factors that might accentuate or diminish the effects of decentralization on macroeconomic stability. Our results found that decentralization appears to lead to a decrease in inflation rate. However, we do not find any correlation between decentralization with the level of fiscal deficit. Our results also show that the impact of decentralization on inflation is conditional on the level of perceived corruption and political institutions.

Suggested Citation

  • Ahmad Zafarullah Abdul Jalil & Mukaramah Harun & Siti Hadijah Che Mat, 2012. "Macroeconomic Instability and Fiscal Decentralization: An Empirical Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2012(2), pages 150-165.
    • Handle: RePEc:prg:jnlpep:v:2012:y:2012:i:2:id:416:p:150-165
    DOI: 10.18267/j.pep.416
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    References listed on IDEAS

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    1. Junaid Ahmad & Shantayanan Devarajan & Stuti Khemani & Shekhar Shah, 2006. "Decentralization and Service Delivery," Chapters, in: Ehtisham Ahmad & Giorgio Brosio (ed.), Handbook of Fiscal Federalism, chapter 10, Edward Elgar Publishing.
    2. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 869-903.
    3. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
    4. Mr. Arvind Subramanian & Mr. Shanker Satyanath, 2004. "What Determines Long-Run Macroeconomic Stability? Democratic Institutions," IMF Working Papers 2004/215, International Monetary Fund.
    5. King, David & Ma, Yue, 2001. "Fiscal decentralization, central bank independence, and inflation," Economics Letters, Elsevier, vol. 72(1), pages 95-98, July.
    6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    7. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española / Review of Public Economics, IEF, vol. 179(4), pages 25-49, September.
    8. Tsebelis, George, 1995. "Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarism, Multicameralism and Multipartyism," British Journal of Political Science, Cambridge University Press, vol. 25(3), pages 289-325, July.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Bojanic, Antonio N., 2018. "The impact of fiscal decentralization on growth, inflation and inequality in the Americas," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    2. Rabia Haroon & Zainab Jehan, 2022. "Measuring the impact of violence on macroeconomic instability: evidence from developing countries," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 21(1), pages 3-30, January.
    3. Makreshanska, Suzana & Petrevski, Goran, 2015. "Fiscal Decentralization and Inflation in Central and Eastern Europe," MPRA Paper 77596, University Library of Munich, Germany, revised 16 Mar 2017.

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    More about this item

    Keywords

    macroeconomic stability; decentralization; fiscal federalism; institutional and political environment;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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