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Fiscal stability during the great recesion: Putting decentralization design to the test

Author

Listed:
  • Santiago Lago-Peñas
  • Jorge Martínez-Vázquez
  • Agnese Sacchi

Abstract

There is a longstanding debate in the economics literature on whether fiscally decentralized countries are inherently more fiscally unstable. The Great Recession provides a fertile testing ground for analyzing how the degree of decentralization does actually affect countries’ ability to implement fiscal stabilization policies in response to macroeconomic shocks. We provide an empirical analysis aiming at disentangling the roles played by decentralization design itself and several recently introduced budgetary institutions such as subnational borrowing rules and fiscal responsibility laws on country’s fiscal stability. We use OECD countries’ data since 1995, which includes both a boom period of worldwide economic growth and the Great Recession. Our main finding is that well-designed decentralized systems are not destabilizing. But, in addition, sub-national fiscal and borrowing rules should be at work to improve the overall fiscal stability performance of decentralized countries.

Suggested Citation

  • Santiago Lago-Peñas & Jorge Martínez-Vázquez & Agnese Sacchi, 2018. "Fiscal stability during the great recesion: Putting decentralization design to the test," Working Papers. Collection A: Public economics, governance and decentralization 1806, Universidade de Vigo, GEN - Governance and Economics research Network.
  • Handle: RePEc:gov:wpaper:1806
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    References listed on IDEAS

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    Keywords

    sub-national governments; political decentralization; fiscal stability; public deficit.;

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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