Decentralization and overborrowing in a fiscal federation
We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local governments' fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for from 19 percent to 40 percent of changes in general government debt in Spain during 1988-2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27 percent and raise welfare by 3.75 percent.
Year of publication: |
2018
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Authors: | Guo, Si ; Pei, Yun ; Xie, Zoe |
Publisher: |
Atlanta, GA : Federal Reserve Bank of Atlanta |
Subject: | fiscal federalism | time-consistent policy | decentralization | public debt |
Saved in:
freely available
Series: | Working Paper ; 2018-9 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 10.29338/wp2018-09 [DOI] 1030103402 [GVK] hdl:10419/200531 [Handle] |
Classification: | E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination ; E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation ; H74 - State and Local Borrowing |
Source: |
Persistent link: https://www.econbiz.de/10012030275
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