Interdependence of fiscal decentralisation and economic development: a vector autoregression analysis

Hannarong Shamsub and Rock-Antoine Mehanna

Global Business and Economics Review, 2005, vol. 7, issue 2/3, 262-277

Abstract: This empirical study investigates the relationship between local fiscal decentralisation and economic development among all US states from 1977 through 1997 by employing a vector autoregression (VAR) model. While past literature focused on a one way relationship between fiscal decentralisation and economic development, this paper is the first to examine a reciprocal relationship between both variables. Both VAR and Granger causality result indicate that the reciprocal relationship exists in 18 states where nine of the 18 states had a positive relationship, five states had a negative relationship, and the remaining four states had mixed signs. The negative reciprocal relationship implies the lowest form of development, the mixed sign reciprocal relationship indicates the second level of economic development, whereas the positive simultaneous relationship indicates the highest form of development.

Keywords: local fiscal decentralisation; economic development; vector autoregression; USA; United States; H720; O100. (search for similar items in EconPapers)
Date: 2005
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