The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
July 21, 2016
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Summary
We assess the extent to which fiscal transfers smooth regional shocks in three large federations: the U.S., 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.
Subject: Disposable income, Fiscal federalism, Fiscal policy, Fiscal transfers, National accounts, Personal income
Keywords: coefficient estimate, confidence level, Disposable income, estimation result, fiscal federalism, Fiscal transfers, Global, OLS estimator, per capita income, Personal income, potential GDP, redistribution, redistribution effect, redistribution estimate, risk pooling, risk-sharing, risk-sharing estimate, two-step estimation method, WP
Pages:
34
Volume:
2016
DOI:
Issue:
141
Series:
Working Paper No. 2016/141
Stock No:
WPIEA2016141
ISBN:
9781498379601
ISSN:
1018-5941
