Regional finance and fiscal regulation: estimating fiscal multiplier

This paper estimates the response of gross regional product (GRP) in the constituent entities of the Russian Federation1 (multipliers) to fiscal flow (revenue and expenditure) shocks both at the level of individual regions and across all levels of government budget, including federal and regional budgets, as well as extra-budgetary funds. The authors have compiled a database of fiscal flows of all levels for the constituent entities of the Russian Federation, incorporating proxy variables to capture all withdrawals and injections of financial resources from/into regional economies by government agencies. The study also provides an assessment of the impact of fiscal policy on regional economies in the regions grouped into clusters by the level of economic development and by the type of expenditure (social or economic expenditures). The main finding of the study is the assessment of the combined impact of fiscal revenue and expenditure multipliers across the constituent entities of the Russian Federation. This assessment has revealed an overall negative effect on the economy from expanded fiscal flow (revenue and expenditure) shocks. The negative effect of withdrawing funds from the regional economy exceeds the positive effect of injecting funds into it. The GRP response is at its maximum at the time of both revenue and expenditure shocks. A relatively positive impact on the economy is noted from the redistribution of income from regions with higher levels of economic development to those with lower levels. The accumulated effect on economic activity from increased budget expenditure in less developed regions is higher compared to more developed regions. Injecting budgetary funds into the economies of less developed regions has a greater multiplier effect than if those funds were returned to the economies of more developed regions. During periods of economic stimulus and budget deficits, regions with lower levels of economic development experience a relatively greater impact from fiscal policy on economic activity. On the contrary, during periods of fiscal consolidation and budget surpluses, these regions incur relatively higher GRP losses compared to those with higher levels of economic development.