Fiscal stability during the Great Recession: putting decentralization design to the test

This paper provides an empirical analysis aimed at disentangling the roles played by decentralization level and design as well as the extended decentralized framework provided by subnational borrowing rules and fiscal responsibility laws on a country's fiscal stability. Using Organisation for E...

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Bibliographic Details
Published in:Regional studies 2020-07, Vol.54 (7), p.919-930
Main Authors: Lago-Peñas, Santiago, Martinez-Vazquez, Jorge, Sacchi, Agnese
Format: Article
Language:English
Subjects:
Decentralization
Design
Economic development
Economic stabilization
Empirical analysis
Financial management
fiscal stability
Great Recession
Imbalance
political decentralization
public deficit
Recessions
Stability
subnational governments
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Summary:This paper provides an empirical analysis aimed at disentangling the roles played by decentralization level and design as well as the extended decentralized framework provided by subnational borrowing rules and fiscal responsibility laws on a country's fiscal stability. Using Organisation for Economic Co-operation and Development (OECD) countries' data from the period 1995-2014, strong regularities are found regarding the effects of decentralization, even during the recent Great Recession. Higher levels of fiscal decentralization have a beneficiary effect on fiscal performance, but the positive impact erodes rapidly with the level of vertical fiscal imbalance. Other fiscal institutions shaping decentralization design, such as borrowing and other fiscal rules, can also contribute to foster fiscal stability.
ISSN:0034-3404
1360-0591
DOI:10.1080/00343404.2019.1637836