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Stabilizing intergovernmental transfers in Latin America : a complement to national/subnational fiscal rules?

Listed author(s):
  • Gonzalez, Christian Y.
  • Rosenblatt, David
  • Webb, Steven B.

The traditional theory of fiscal federalism assigns the role of macroeconomic stabilization to the federal government. In addition to this long-standing theoretical result, there is empirical observation that federal governments in developing countries typically have cheaper and more stable access to capital markets, relative to subnational governments. Drawing on the recent experience of four large federal countries in Latin America-Argentina, Brazil, Colombia, and Mexico--the authors examine how intergovernmental transfers affect the division of the burden of stabilization across the levels of government, when the nation as a whole faces economic fluctuations. Imposing stabilizing rules on federal transfers that protect subnational governments from fluctuations in the business cycle can serve two purposes. During boom periods, stabilizing rules prevent subnational governments'tendency to increase inflexible expenditures. And during downturns, stabilizing rules place the burden of borrowing at the federal level-the level most appropriate for macroeconomic stabilization and often the level with superior access to credit. Despite the logic of these rules, recent experience of the four countries reveals that these rules can be risky, particularly inthe face of high GDP volatility. Protection against falling revenues in the downturn constitutes a contingent liability for the central government. Argentina's stabilizing rule contributed to fiscal and political tensions during its ongoing crisis. Colombia is beginning to implement similar rules. Meanwhile, Brazilian and Mexican transfers do not implement such rules and fiscal and economic results do not appear to have fared any worse for this absence. The authors draw on the country experience to establish that certain conditions should be in place before establishing a stabilization rule to federal-to-subnational fiscal transfers-in particular the elimination of long-term structural fiscal imbalances, either within levels of government or across levels of government.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2869.

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Date of creation: 31 Jul 2002
Handle: RePEc:wbk:wbrwps:2869
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  1. Ernesto Stein & Ernesto Talvi & Alejandro Grisanti, 1999. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Chapters,in: Fiscal Institutions and Fiscal Performance, pages 103-134 National Bureau of Economic Research, Inc.
  2. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(3), pages 459-472, September.
  3. Rojas Hurtado, Fernando, 1997. "Estructura, funcionamiento y políticas de los fondos de cofinanciación en países seleccionados: práctica y principales desafíos," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 30868, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  4. Bayoumi, Tamim & Masson, Paul R, 1998. "Liability-Creating versus Non-liability-Creating Fiscal Stabilisation Policies: Ricardian Equivalence, Fiscal Stabilisation, and EMU," Economic Journal, Royal Economic Society, vol. 108(449), pages 1026-1045, July.
  5. Mariano Tommasi & Sebastian Saiegh & Pablo Sanguinetti, 2001. "Fiscal Federalism in Argentina: Policies, Politics, and Institutional Reform," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 157-212, January.
  6. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-138, May.
  7. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 205-259, April.
  8. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, December.
  9. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
  10. Thomas Courchene, 1999. "Subnational Budgetary and Stabilization Policies in Canada and Australia," NBER Chapters,in: Fiscal Institutions and Fiscal Performance, pages 301-348 National Bureau of Economic Research, Inc.
  11. Afonso S. Bevilaqua, 2000. "State-government bailouts in Brazil," Textos para discussão 421, Department of Economics PUC-Rio (Brazil).
  12. George Kopits, 2001. "Fiscal Rules; Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 01/145, International Monetary Fund.
  13. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 459-72, September.
  14. Huertas, Marcela & Perry, Guillermo, 1997. "La historia de una crisis anunciada: regulando el endeudamiento de las municipalidades y los departamentos en Colombia," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 30864, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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