Fiscal Adjustment under Centralized Federalism: Empirical Evaluation of the Response to Budgetary Shocks

Jorn Rattso

FinanzArchiv: Public Finance Analysis, 2004, vol. 60, issue 2, 240-261

Abstract: Fiscal federalism implies a challenge of holding fiscal discipline at the local level. Recent analyses of fiscal adjustment have addressed the design of fiscal and political institutions for the U.S. states, and have shown how tax limits and anti-deficit rules strengthen immediate shock adjustment. Here we extend the evidence to the case of centralized financing in Norway. In this system central government takes a larger responsibility in smoothing decentralized government revenue, but at the same time the localities are more vulnerable to shocks because of their limited room to maneuver. The empirical analysis of responses to budgetary shocks shows that local public investment is the main shock absorber in this system and that investments are procyclical. Local fiscal crisis is avoided, but decentralized government is destabilizing.

Keywords: fiscal federalism; fiscal discipline; asymmetric shocks (search for similar items in EconPapers)
JEL-codes: D71 D73 H61 H62 H72 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (4)

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