Decentralization, Subnational Governments' Behaviour and Macroeconomic Instability: The Case of Malaysia

In the last two decades there has been a worldwide interest in decentralization of government in all parts of the world. There are two main objectives that we tried to achieve through this study. Firstly, we tried to examine empirically the effects of decentralization on macroeconomic stability. Even though there is a huge literature both theoretically and empirically on the impact of decentralization, not many of them seems to be interested on the question of the link between decentralization and macroeconomic stability. Nevertheless, it should be noted that the outcome of a decentralization policy which in short can be defined as the delegation of more powers and responsibilities to lower level governments, depends largely on the behavior of these subnational governments. As such, in the second part of this thesis, we tried to analyze the determinants of subnational governments’ behaviors. More specifically, we tried to look at the relation between the behavior of subnational governments and the institutions in which they evolve and more particularly the incentives that result from these institutions. In order to achieve that, we used Malaysia as our case study.