The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations

Tigran Poghosyan, Abdelhak Senhadji and Carlo Cottarelli

No 2016/141, IMF Working Papers from International Monetary Fund

Abstract: We assess the extent to which fiscal transfers smooth regional shocks in three large federations: the U.S., Canada, and Australia. We find that fiscal transfers offset 4-11 percent of idiosyncratic shocks (risk-sharing) and 13-24 percent of permanent shocks (redistribution). This fiscal insurance largely operates through automatic stabilizers embedded in a central budget primarily through federal taxes and transfers to individuals, rather than transfers from the central government to state budgets. These results have implications for the design of fiscal risk-sharing mechanisms in the euro area.

Keywords: WP; risk pooling; fiscal federalism; risk-sharing; redistribution; estimation result; two-step estimation method; OLS estimator; coefficient estimate; confidence level; redistribution effect; redistribution estimate; per capita income; potential GDP; risk-sharing estimate; Fiscal transfers; Disposable income; Personal income; Global (search for similar items in EconPapers)
Pages: 34
Date: 2016-07-21
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Citations: View citations in EconPapers (10)

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Working Paper: The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations (2016)
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