The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
35 Pages Posted: 4 Aug 2017
Date Written: July 2016
This paper assesses the extent to which fiscal transfers smooth regional shocks in three large federations: the US, 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: public debt cycles, credit cycles, asset price cycles, duration analysis
JEL Classification: E6; C4; H6
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