The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
35 Pages Posted: 9 Dec 2016
Date Written: July 2016
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: Suggested Citation