Intergovernmental transfers and dynamic adjustment of subnational budgets

Alberto Porto, Jorge Puig () and Bautista Vidal

CEFIP, Working Papers from CEFIP, Universidad Nacional de La Plata

Abstract: We study the dynamic impact of intergovernmental transfers on subnational budgets. Unlike the abundant literature that focuses on local governments, in this paper we study intermediate governments. Using the ideal case of a multi-level government like Argentina, and methods for dynamic analysis, we disentangled the nature of subnational fiscal adjustments that follow a shock in federal transfers. In the short run, transfers lead to a more than proportional increase in spending, while own-source revenues rise slightly, resulting in a deficit. In the long-run, provinces recover fiscal equilibrium by adjusting spending and taxes to a level consistent with a balanced budget. The steady-state equilibrium involves a higher level of spending, as transfers increase endogenously as a result of cross-regional spillover effects. We also provide a potential mechanisms driving fiscal adjustments and explore relevant extensions that consider regional disparities and different types of taxes, spending, and transfers used to balance subnational budgets. Overall, the paper offers valuable insights for designing subnational fiscal policy.

JEL-codes: D72 H11 H20 H50 H77 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2025-01
New Economics Papers: this item is included in nep-pbe and nep-pol
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Related works:
Working Paper: Intergovernmental transfers and dynamic adjustment of subnational budgets (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:akh:wcefip:049

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