Counter Cyclical Transfer for Infrastructure – A Framework for Fiscal Policy Coordination and Economic Stability
31 Pages Posted: 2 Dec 2011
Date Written: November 13, 2011
This article examines the theory behind the design of fiscal transfers; it identifies acyclicality of transfers as a drawback and proposes counter cyclical design as an optimal fiscal framework to mitigate cyclical economic fluctuations. It further advocates counter-cyclical transfers for infrastructure investment, service maintenance, and business tax relief as incentives for states to save in boom years then build from recession into recovery. The framework is set to operate on time consistent policy rules, as automatic stabilizers with triggers from key economic indicators. It advocates dynamic equity to compensate boom-year donor states during recession for more effective macroeconomic stabilization. This article focuses on fiscal policy, does not discuss the political dynamics or details in implementation.
Keywords: fiscal policy, fiscal transfer, economic stability, infrastructure investment, policy coordination
JEL Classification: H50, H54, H70, H77
Suggested Citation: Suggested Citation