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

35 Pages Posted: 9 Dec 2016

See all articles by Tigran Poghosyan

Tigran Poghosyan

International Monetary Fund (IMF)

Abdelhak S. Senhadji

International Monetary Fund (IMF)

Carlo Cottarelli

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2016

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: Fiscal stabilization, United States, Canada, Australia, Fiscal risk, Regional shocks, Stabilization measures, Fiscal policy, public debt cycles, credit cycles, asset price cycles, duration analysis

JEL Classification: E60, C40, H60

Suggested Citation

Poghosyan, Tigran and Senhadji, Abdelhak S. and Cottarelli, Carlo, The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations (July 2016). IMF Working Paper No. 16/141, Available at SSRN: https://ssrn.com/abstract=2882576

Tigran Poghosyan (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Abdelhak S. Senhadji

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Carlo Cottarelli

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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