The Fiscal Decentralisation and Economic Growth Nexus Revisited

This paper addresses two challenges that the fiscal decentralisation and economic growth nexus faces – namely, endogeneity problems and inaccurate measurement of fiscal decentralisation. We introduce novel instrumental variables based on common legal system origin, common federal system, geographica...

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Bibliographic Details
Published in:Fiscal studies 2017-03, Vol.38 (1), p.141-171
Main Authors: Ligthart, Jenny E., van Oudheusden, Peter
Format: Article
Language:English
Subjects:
C26
Decentralization
Economic development
Economic growth
Economic models
endogeneity
fiscal decentralisation
Fiscal policy
H77
instrumental variables
Legal system
O47
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Summary:This paper addresses two challenges that the fiscal decentralisation and economic growth nexus faces – namely, endogeneity problems and inaccurate measurement of fiscal decentralisation. We introduce novel instrumental variables based on common legal system origin, common federal system, geographical position and relative country size. The positive relationship between fiscal decentralisation and economic growth that we find remains valid when using these instrumental variables. Using fiscal decentralisation measures that better reflect the autonomy of subnational governments changes this relationship. This finding, however, is the result of the accompanying changes in the sample rather than the use of these alternative measures themselves.
ISSN:0143-5671
1475-5890
DOI:10.1111/1475-5890.12099