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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, University of Economics, Prague, vol. 2012(2), pages 150-165.
  • Handle: RePEc:prg:jnlpep:v:2012:y:2012:i:2:id:416:p:150-165
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    References listed on IDEAS

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    1. Arvind Subramanian & Shanker Satyanath, 2004. "What Determines Long-Run Macroeconomic Stability? Democratic Institutions," IMF Working Papers 04/215, International Monetary Fund.
    2. 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.
    3. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española, IEF, vol. 179(4), pages 25-49, September.
    4. Junaid Ahmad & Shantayanan Devarajan & Stuti Khemani & Shekhar Shah, 2006. "Decentralization and Service Delivery," Chapters,in: Handbook of Fiscal Federalism, chapter 10 Edward Elgar Publishing.
    5. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 869-903.
    6. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
    7. King, David & Ma, Yue, 2001. "Fiscal decentralization, central bank independence, and inflation," Economics Letters, Elsevier, vol. 72(1), pages 95-98, July.
    8. 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. 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.

    More about this item

    Keywords

    macroeconomic stability; decentralization; fiscal federalism; institutional and political environment;

    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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