Fiscal Institutions and the Relation between Central and Sub-National Government Fiscal Balances

Abstract

Skeptics of fiscal decentralization argue that it can complicate fiscal stabilization policies at the level of the central government because of uncoordinated fiscal actions by the national and sub-national tiers of government. However, panel data estimates for Organisation for Economic Co-operation and Development economies suggest that this danger has been overstated in that changes in the fiscal balances of central and sub-national governments are highly positively correlated. This result partly reflects the success of institutional arrangements that govern intergovernmental fiscal relations and appears unrelated to the extent of fiscal decentralization.