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Intergovernmental Transfers: Are they pro- or counter-cyclical?
Author/s: Hansjörg Blöchliger, Balázs Égert 
Year:  2017 Issue: Language: English 
Pages:  16 Pg. 5-20 FullText PDF:  238 KB
DOI:  10.3280/EP2017-003001
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This note describes an empirical analysis to measure the cyclical properties of intergovernmental transfers. By modelling a fiscal policy reaction function, the paper tests whether transfers systems in 25 member countries of the Organisation for Economic Co-operation and Development (OECD) are pro-or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries and tend to destabilise sub-central economies. Pro-cyclical grants hence often exacerbate the pro-cyclicality of sub-central fiscal policy. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often a fixed share of central government tax revenue which itself tends to be pro-cyclical. Moreover, many grants are matching sub-central spending and hence tend to increase when sub-central spending rises. Finally, reform proposals are presented to make transfer systems less cyclical and more stabilising.
Keywords: Fiscal federalism, stabilisation, intergovernmental transfers, pro-cyclicality
Jel Code: H42, H50, H77

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Hansjörg Blöchliger, Balázs Égert, in "ECONOMIA PUBBLICA " 3/2017, pp. 5-20, DOI:10.3280/EP2017-003001


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