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Fiscal Integration with Internal Trade: Quantifying the Effects of Equalizing Transfers

Author

Listed:
  • Trevor Tombe

    (University of Calgary)

  • Jennifer Winter

    (University of Calgary)

Abstract

Fiscal transfers between regions exist within many countries. Explicit transfers, such as Canada's equalization program, redistribute funds directly. Countless federal revenue and spending programs do so indirectly. Like capital flows between countries, such transfers interact with trade and affect the distribution of economic activity within and between subnational jurisdictions. Previous research has largely abstracted from trade considerations; we fill this gap. With the aid of a rich quantitative model and detailed data on within-country trade and financial flows, we uncover important effects of fiscal transfers on provincial income, migration, and national GDP in Canada. The effects are large. Transfers lower Alberta's real income by over 8 per cent and its population by over 12 per cent, and increase PEI's real income by 30 per cent and its population by 50 per cent. As employment shifts to lower productivity regions, we find transfers shrink Canada's real GDP by 0.8 per cent and income-sensitive transfers do so by as much as 1.2 per cent — equal to $19-28 billion today. Finally, fiscal transfers affect the size and distribution of gains from internal trade liberalization and spread gains across all regions, even if policy (like the New West Partnership) liberalizes trade only among some.

Suggested Citation

  • Trevor Tombe & Jennifer Winter, "undated". "Fiscal Integration with Internal Trade: Quantifying the Effects of Equalizing Transfers," Working Papers 2013-28, Department of Economics, University of Calgary, revised 04 Oct 2018.
  • Handle: RePEc:clg:wpaper:2013-28
    as

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    File URL: https://econ.ucalgary.ca/sites/econ.ucalgary.ca.manageprofile/files/unitis/publications/1-4681118/tombe_winter_2019.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Natalia Ramondo & Andrés Rodríguez-Clare & Milagro Saborío-Rodríguez, 2016. "Trade, Domestic Frictions, and Scale Effects," American Economic Review, American Economic Association, vol. 106(10), pages 3159-3184, October.
    2. Lukas Albrecht & Trevor Tombe, 2016. "Internal trade, productivity and interconnected industries: A quantitative analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 237-263, February.
    3. repec:clg:wpaper:2014-35 is not listed on IDEAS
    4. Trevor Tombe, "undated". "Final, Unalterable (and Up for Negotiation): Federal-Provincial Transfers in Canada," Working Papers 2018-13, Department of Economics, University of Calgary, revised 22 Oct 2018.

    More about this item

    Keywords

    Fiscal integration; internal trade; gains from trade; misallocation; productivity;

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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