A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation
This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central...
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World Bank, Washington, DC
2022
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| Online Access: | http://documents.worldbank.org/curated/en/734581644250111392/A-Dynamic-Model-of-Fiscal-Decentralization-and-Public-Debt-Accumulation http://hdl.handle.net/10986/36968 |
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okr-10986-369682022-02-11T05:10:32Z A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation Guo, Si Pei, Yun Xie, Leiyu FISCAL DECENTRALIZATION PUBLIC DEBT FISCAL IMBALANCE LOCAL GOVERNMENT FINANCES GOVERNMENT TRANSFERS This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments to offset vertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments’ expected cost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reduce local governments’ future need to borrow, and in the equilibrium both local and central debts are inefficiently high. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, local governments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains 39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988–1996, and 18 percent of the fall in debt when the imbalances narrowed during 1996–2006. 2022-02-10T15:20:38Z 2022-02-10T15:20:38Z 2022-02 Working Paper http://documents.worldbank.org/curated/en/734581644250111392/A-Dynamic-Model-of-Fiscal-Decentralization-and-Public-Debt-Accumulation http://hdl.handle.net/10986/36968 English Policy Research Working Paper;No. 9927 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
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Digital Repository |
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Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
FISCAL DECENTRALIZATION PUBLIC DEBT FISCAL IMBALANCE LOCAL GOVERNMENT FINANCES GOVERNMENT TRANSFERS |
| spellingShingle |
FISCAL DECENTRALIZATION PUBLIC DEBT FISCAL IMBALANCE LOCAL GOVERNMENT FINANCES GOVERNMENT TRANSFERS Guo, Si Pei, Yun Xie, Leiyu A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| relation |
Policy Research Working Paper;No. 9927 |
| description |
This paper develops a dynamic
infinite-horizon model with two layers of governments to
study theoretically and quantitatively how fiscal
decentralization affects local and central government debt
accumulation and spending. In the model, the central
government makes transfers to local governments to offset
vertical and horizontal fiscal imbalances. But the
anticipation of transfers lowers local governments’ expected
cost of borrowing and leads to overborrowing ex ante. Absent
commitment, the central government over-transfers to reduce
local governments’ future need to borrow, and in the
equilibrium both local and central debts are inefficiently
high. Consistent with empirical evidence, when fiscal
decentralization widens vertical fiscal imbalances, local
governments become more reliant on transfers, and both local
and central debts rise. Applied to Spain, the model explains
39 percent of the rise in total government debt when the
vertical fiscal imbalances widened during 1988–1996, and 18
percent of the fall in debt when the imbalances narrowed
during 1996–2006. |
| format |
Working Paper |
| author |
Guo, Si Pei, Yun Xie, Leiyu |
| author_facet |
Guo, Si Pei, Yun Xie, Leiyu |
| author_sort |
Guo, Si |
| title |
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| title_short |
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| title_full |
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| title_fullStr |
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| title_full_unstemmed |
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation |
| title_sort |
dynamic model of fiscal decentralization and public debt accumulation |
| publisher |
World Bank, Washington, DC |
| publishDate |
2022 |
| url |
http://documents.worldbank.org/curated/en/734581644250111392/A-Dynamic-Model-of-Fiscal-Decentralization-and-Public-Debt-Accumulation http://hdl.handle.net/10986/36968 |
| _version_ |
1764486296707792896 |