EconPapers    
Economics at your fingertips  
 

Decentralization and Overborrowing in a Fiscal Federation

Si Guo, Yun Pei () and Zoe Xie

No 2018-9, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local governments’ fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for from 19 percent to 40 percent of changes in general government debt in Spain during 1988–2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27 percent and raise welfare by 3.75 percent.

Keywords: fiscal federalism; time-consistent policy; decentralization; public debt (search for similar items in EconPapers)
JEL-codes: E61 E62 H74 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
Date: 2018-08-23
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.frbatlanta.org/-/media/documents/resea ... ation-2018-08-13.pdf Full text (application/pdf)

Related works:
Working Paper: Decentralization and Overborrowing in a Fiscal Federation (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2018-09

Ordering information: This working paper can be ordered from

DOI: 10.29338/wp2018-09

Access Statistics for this paper

More papers in FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by Elaine Clokey ().

 
Page updated 2019-12-11
Handle: RePEc:fip:fedawp:2018-09