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Vertical Fiscal Imbalances and the Accumulation of Government Debt

Author

Listed:
  • Inaki Aldasoro
  • Mr. Mike Seiferling
Abstract
Delegating fiscal decision making power to sub-national governments has been an area of interest for both academics and policymakers given the expectation that it may lead to better and more efficient provision of public goods and services. Decentralization has, however, often occurred on the expenditure and less on the revenue side, creating “vertical fiscal imbalances” where sub-national governments’ expenditures are not financed through their own revenues. The mismatch between own revenues and expenditures may have consequences for public finance performance. This study constructs a large sample of general and subnational level fiscal data beginning in 1980 from the IMF’s Government Finance Statistics Yearbook. Extending the literature to the balance sheet approach, this paper examines the effects of vertical fiscal imbalances on government debt. The results indicate that vertical fiscal imbalances are relevant in explaining government debt accumulation suggesting a degree of caution when promoting fiscal decentralization. This paper also underlines the role of data covering the general government and its subectors for comprehensive analysis of fiscal performance.

Suggested Citation

  • Inaki Aldasoro & Mr. Mike Seiferling, 2014. "Vertical Fiscal Imbalances and the Accumulation of Government Debt," IMF Working Papers 2014/209, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2014/209
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    References listed on IDEAS

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    Cited by:

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    2. Kalamov, Zarko & Staal, Klaas, 2023. "Too-big-to-fail in federations?," Regional Science and Urban Economics, Elsevier, vol. 101(C).
    3. Liu, Yan & Wu, Guowei & Xiong, Chen, 2024. "Countercyclical central government transfers incentivize local government overborrowing: Theory and evidence," Economic Modelling, Elsevier, vol. 132(C).
    4. Guo, Si & Pei, Yun & Xie, Zoe, 2022. "A dynamic model of fiscal decentralization and public debt accumulation," Journal of Public Economics, Elsevier, vol. 212(C).
    5. Si Guo & Yun Pei & Zoe Xie, 2018. "Decentralization and Overborrowing in a Fiscal Federation," FRB Atlanta Working Paper 2018-9, Federal Reserve Bank of Atlanta.
    6. Lenka Maličká, 2019. "Formálna dimenzia fiškálnej decentralizácie v kontexte vertikálnej fiškálnej nerovnováhy a finančnej autonómie miestnych samospráv Slovenskej republiky [Formal Dimension of Fiscal Decentralization ," Politická ekonomie, Prague University of Economics and Business, vol. 2019(3), pages 273-290.
    7. Аnna A. Mikhaylova & Evgeny N. Timushev, 2021. "Concept of Vertical Fiscal Imbalance in the Analysis of Fiscal Sustainability at the Regional Level," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 6, pages 98-116, December.
    8. Klimanov, V. & Mikhaylova, A., 2021. "Fiscal decentralization in pandemic and post-pandemic times," Journal of the New Economic Association, New Economic Association, vol. 51(3), pages 218-226.
    9. Jia, Junxue & Ding, Siying & Liu, Yongzheng, 2020. "Decentralization, incentives, and local tax enforcement," Journal of Urban Economics, Elsevier, vol. 115(C).
    10. Ryota Nakatani & Qianqian Zhang & Isaura Garcia Valdes, 2024. "Health Expenditure Decentralization and Health Outcomes: The Importance of Governance," Publius: The Journal of Federalism, CSF Associates Inc., vol. 54(1), pages 59-87.
    11. Si Guo & Yun Pei & Zoe Xie, 2018. "Fiscal Decentralization, Intergovernmental Transfer, and Overborrowing," 2018 Meeting Papers 975, Society for Economic Dynamics.
    12. Michael Klien & Hans Pitlik & Matthias Firgo & Ulrike Famira-Mühlberger, 2020. "Ein Modell für einen strukturierten vertikalen Finanzausgleich in Österreich," WIFO Studies, WIFO, number 65854, March.
    13. Wu, Haijun & Yang, Jidong & Yang, Qijing, 2021. "The pressure of economic growth and the issuance of Urban Investment Bonds: Based on panel data from 2005 to 2011 in China," Journal of Asian Economics, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    WP; government; country; fiscal consolidation effort; government finance statistics yearbook; fiscal decentralization; vertical fiscal imbalances; panel data; public debt; GFSY; government fragmentation; government indebtedness; government debt series; authority index; government debt database; OECD country; Fiscal stabilization; Fiscal stance; Fiscal federalism; Global;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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