Intergovernmental Transfers: Are they pro- or counter-cyclical?

Hansj?rg Bl?chliger and Bal?zs ?gert
Authors registered in the RePEc Author Service: Balázs Égert and Hansjörg Blöchliger

ECONOMIA PUBBLICA, 2017, vol. 2017/3, issue 3, 5-20

Abstract: This note describes an empirical analysis to measure the cyclical properties of intergovernmental transfers. By modelling a fiscal policy reaction function, the paper tests whether transfers systems in 25 member countries of the Organisation for Economic Co-operation and Development (OECD) are pro-or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries and tend to destabilise sub-central economies. Pro-cyclical grants hence often exacerbate the pro-cyclicality of sub-central fiscal policy. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often a fixed share of central government tax revenue which itself tends to be pro-cyclical. Moreover, many grants are matching sub-central spending and hence tend to increase when sub-central spending rises. Finally, reform proposals are presented to make transfer systems less cyclical and more stabilising.

JEL-codes: H42 H50 H77 (search for similar items in EconPapers)
Date: 2017
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