Bulletin n. 2/2016 | ||
December 2016 | ||
Davide Furceri, Agnese Sacchi, Simone Salotti |
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Can Fiscal Decentralization Alleviate Government Consumption Volatility? | ||
in Open Economies Review , Volume 27, Issue 4 , 2016 , 611-636 | ||
This paper assesses the effect of fiscal decentralization on government consumption volatility using data for 97 developed and developing countries from 1971 to 2010. The results suggest that a higher degree of fiscal decentralization leads to lower government consumption volatility. This result holds for the sub-sample of advanced economies, while it is not confirmed for those less-developed. This mechanism seems to work mainly through a lower volatility of the non-discretionary spending, which typically belongs to the central government’s policy. We also confirm existing findings according to which country size lowers government spending volatility. Thus, given a minimum level of development, fiscal decentralization reforms can reduce spending volatility by distributing power to sub-central governments, particularly in smaller countries which are usually more prone to volatility. | ||