Stabilization of Federal Transferences: A Proposal for the Mexican Federal Entities Based on the Economic Cycle

We propose an instrument to smooth the cyclical fluctuations of federal transfers (participaciones) with a rainy day fund mechanism through a stabilization fund. The rule works by means of saving federal transfers (participaciones) during good times in order to smooth the impact of cyclical revenue fluctuations in the business cycle recession phase. Taking into account the three most recent upswings experienced by the Mexican economy since 1993 (1993-1994, 1997-2000 and 2006-2008), the results obtained through a contrafactual scenario show that in the most recent upswing (2006-2008) the Mexican federal entities could have saved —on average— an amount equivalent to 5 per cent of the total revenue they had at the beginning of the 2009 downturn.