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Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan

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  • Iqbal, Nasir
  • Nawaz, Saima

Abstract

The research on the relationship between macroeconomic stability and fiscal decentralization has been rather inconclusive about the benefits of fiscal decentralization. The current paper is the first to investigate the effect of fiscal decentralization on macroeconomic stability by using Misery Index at country level especially for Pakistan. The evidence that has been presented reveals a significant positive impact of fiscal decentralization on macroeconomic stability of Pakistan, although the results are much weaker for expenditure decentralization. Effectiveness of expenditure decentralization in curtailing macroeconomic instability is depending upon the level of revenue decentralization. The current study clearly indicates that process of fiscal decentralization is beneficial for the economy of Pakistan. The present developments under taken by the government of Pakistan in term of 7th NFC award and 18th Constitutional Amendment will have clear implications for the Pakistan’s long term economic prosperity and macroeconomic stability. However, outcome of these reforms crucially depends upon the will of the political government.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27184.

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Date of creation: 02 Dec 2010
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Handle: RePEc:pra:mprapa:27184
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Keywords: Fiscal Decentralization; Macroeconomic Stability; Pakistan;

Find related papers by JEL classification:

  • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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  1. Bahl, Roy W. & Wallich, Christine, 1992. "Intergovernmental fiscal relations in China," Policy Research Working Paper Series 863, The World Bank.
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  9. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española, IEF, vol. 179(4), pages 25-49, September.
  10. International Monetary Fund, 2000. "Can Fiscal Decentralization Strengthen Social Capital?," IMF Working Papers 00/129, International Monetary Fund.
  11. Thornton, John, 2007. "Further evidence on revenue decentralization and inflation," Economics Letters, Elsevier, vol. 95(1), pages 140-145, April.
  12. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, June.
  13. Francesca Fornasari & Steven B. Webb & Heng-fu Zou, 1999. "The Macroeconomic Impact of Decentralized Spending and Deficits: International Evidence," CEMA Working Papers 28, China Economics and Management Academy, Central University of Finance and Economics, revised Oct 2000.
  14. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
  15. King, David & Ma, Yue, 2001. "Fiscal decentralization, central bank independence, and inflation," Economics Letters, Elsevier, vol. 72(1), pages 95-98, July.
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  17. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
  18. Neyapti, Bilin, 2004. "Fiscal decentralization, central bank independence and inflation: a panel investigation," Economics Letters, Elsevier, vol. 82(2), pages 227-230, February.
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Cited by:

  1. Shahbaz, Muhammad & Loganathan, Nanthakumar & Mujahid, Nooreen & Ali, Amjad & Nawaz, Ahmed, 2015. "Determinants of Life Expectancy and its Prospects under the Role of Economic Misery: A Case of Pakistan," MPRA Paper 67167, University Library of Munich, Germany, revised 10 Oct 2015.

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