Fiscal Decentralization and Fiscal Policy Performance

30 Pages Posted: 12 May 2017

See all articles by Moussé Sow

Moussé Sow

International Monetary Fund; Université d'Auvergne - Clermont 1 - Centre d'Etudes et de Recherches sur le Developpement International (CERDI)

Ivohasina Razafimahefa

International Monetary Fund (IMF)

Date Written: March 2017

Abstract

This paper explores the impact of fiscal decentralization on fiscal policy performance in a large sample of advanced and developing economies. The findings suggest that a larger share of decentralized expenditure is associated with a stronger fiscal balance; however, fiscal decentralization can lead to more pro-cyclical fiscal policy. Thus, the design and pace of fiscal decentralization need to be tailored to the specificities of the economy. Countries that have already established strong accountablity and budget management capacity at the local level can benefit from fiscal decentralization. In contrast, in economies prone to large volatility from internal and external shocks, the central government may need to retain a sufficient share of expenditure and revenue to conduct counter-cyclical policies. Finally, the pace of expenditure and revenue decentralization should be aligned.

Keywords: Fiscal balance, Fiscal decentralization, policy cyclicality, Intergovernmental Relations, Deficit

JEL Classification: H77, E62, H62

Suggested Citation

Sow, Moussé and Razafimahefa, Ivohasina, Fiscal Decentralization and Fiscal Policy Performance (March 2017). IMF Working Paper No. 17/64, Available at SSRN: https://ssrn.com/abstract=2967419

Moussé Sow (Contact Author)

International Monetary Fund ( email )

1900 Pennsylvania Avenue, NW
Washington, DC 20431
United States

Université d'Auvergne - Clermont 1 - Centre d'Etudes et de Recherches sur le Developpement International (CERDI) ( email )

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

Ivohasina Razafimahefa

International Monetary Fund (IMF) ( email )

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

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