Can fiscal decentralization alleviate government consumption volatility?

Davide Furceri, Agnese Sacchi and Simone Salotti

MPRA Paper from University Library of Munich, Germany

Abstract: We analyse how fiscal decentralization affects the volatility of government consumption extending the existing literature that mainly deals with the effects of the former on government size. Using data for 97 developed and developing countries from 1971 to 2010, we find that a higher degree of fiscal decentralization leads to lower government consumption volatility. This result holds for the sub-sample of advanced economies, while it is not confirmed for those less-developed. This mechanism seems to work mainly through a lower volatility of the non-discretionary spending, which typically belongs to the central government’s policy. We also confirm existing findings according to which country size lowers government spending volatility. Thus, given a minimum level of development, fiscal decentralization reforms can reduce spending volatility by distributing power to sub-central governments, particularly in smaller countries which are usually more prone to volatility.

Keywords: Fiscal policy; fiscal decentralization; spending volatility; automatic stabilisers; country size (search for similar items in EconPapers)
JEL-codes: E62 H60 H71 H72 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/54683/8/MPRA_paper_54683.pdf revised version (application/pdf)

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