Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200531 
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 2018-9
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local governments' fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for from 19 percent to 40 percent of changes in general government debt in Spain during 1988-2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27 percent and raise welfare by 3.75 percent.
Subjects: 
fiscal federalism
time-consistent policy
decentralization
public debt
JEL: 
E61
E62
H74
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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