Open Economies Review

, Volume 27, Issue 4, pp 611–636 | Cite as

Can Fiscal Decentralization Alleviate Government Consumption Volatility?

  • Davide FurceriEmail author
  • Agnese Sacchi
  • Simone Salotti
Research Article


This paper assesses the effect of fiscal decentralization on government consumption volatility using data for 97 developed and developing countries from 1971 to 2010. The results suggest that a higher degree of fiscal decentralization leads to lower government consumption volatility. This result holds for the sub-sample of advanced economies, while it is not confirmed for those less-developed. This mechanism seems to work mainly through a lower volatility of the non-discretionary spending, which typically belongs to the central government’s policy. We also confirm existing findings according to which country size lowers government spending volatility. Thus, given a minimum level of development, fiscal decentralization reforms can reduce spending volatility by distributing power to sub-central governments, particularly in smaller countries which are usually more prone to volatility.


Fiscal policy Fiscal decentralization Spending volatility Automatic stabilisers Country size 

JEL Classification

H60 H71 H72 E62 



We would like to thank Wolfram Berger, Carmine Trecroci, Alberto Zanardi, participants in the XXV conference of the Italian Association of Public Economics (Pavia, September 2013), and the XXI Meeting on Public Economics (Girona, January 2014), the editor George Tavlas as well as two anonymous referees for useful comments. The usual disclaimer applies.


  1. Acemoglu D, Johnson S, Robinson J, Thaicharoen Y (2003) Institutional causes, macroeconomic symptoms: volatility, crises and growth. J Monet Econ 50(1):49–123CrossRefGoogle Scholar
  2. Afonso A, Furceri D (2008) Government size, composition, volatility and economic growth. ECB Working Paper No. 849Google Scholar
  3. Akai N, Sakata M (2002) Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States. J Urban Econ 52:93–108CrossRefGoogle Scholar
  4. Alesina A, Spolaore E (1997) On the number and size of nations. Q J Econ 112:1027–1056CrossRefGoogle Scholar
  5. Alesina A, Wacziarg R (1998) Openness, country size and government. J Public Econ 69(3):305–321CrossRefGoogle Scholar
  6. Allen F, Gale D (1994) Limited market participation and volatility of asset prices. Am Econ Rev 84(4):933–955Google Scholar
  7. Andrés J, Doménech R, Fatás A (2008) The stabilizing role of government size. J Econ Dyn Control 32(2):571–593CrossRefGoogle Scholar
  8. Arzaghi M, Henderson JV (2005) Why countries are fiscally decentralizing. J Public Econ 89:1157–1189CrossRefGoogle Scholar
  9. Ashworth J, Galli E, Padovano F (2012) Decentralization as a constraint to Leviathan: a panel cointegration analysis. Public Choice. doi: 10.1007/s11127-012-9962-8 Google Scholar
  10. Badinger H (2009) Fiscal rules, discretionary fiscal policy and macroeconomic stability: an empirical assessment for OECD countries. Appl Econ 41(7):829–847CrossRefGoogle Scholar
  11. Black F (1987) Business cycles and equilibrium. Basil Blackwell, New YorkGoogle Scholar
  12. Blanchard O, Perotti R (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q J Econ 117(4):1329–1368CrossRefGoogle Scholar
  13. Blöchliger H, Vammalle C (2012) Australia: the intergovernmental agreement on federal financial relations. In reforming fiscal federalism and local government: beyond the zero-sum Game. OECD PublishingGoogle Scholar
  14. Bodman P, Hodge A (2010) What drives fiscal decentralisation? Further assessing the role of income. Fisc Stud 31(3):373–404CrossRefGoogle Scholar
  15. Brennan G, Buchanan J (1980) The power to tax: analytical foundations of a fiscal constitution. Cambridge University Press, CambridgeGoogle Scholar
  16. Breton A (1987) Towards a theory of competitive federalism. Eur J Polit Econ 3(1–2):263–329CrossRefGoogle Scholar
  17. Cassette A, Paty S (2010) Fiscal decentralisation and the size of government: a European country empirical analysis. Public Choice 143(1–2):173–189CrossRefGoogle Scholar
  18. Coles L, Beck W (2001) Distributed generation can provide an appropriate customer price response to help fix wholesale price volatility. IEEE Power Eng Soc Winter Meet 1:141–143Google Scholar
  19. Dabla-Norris E (2006) The challenge of fiscal decentralisaton in transition countries. Comp Econ Stud 48:100–131CrossRefGoogle Scholar
  20. de Mello LR (2000) Fiscal decentralization and intergovernmental fiscal relations: a cross-country analysis. World Dev 28(2):365–380CrossRefGoogle Scholar
  21. Debrun X, Moulin L, Turrini A, Ayuso-i-Casals J, Kumar MS (2008) Tied to the mast? National fiscal rules in the European Union. Econ Policy 23(54):298–362CrossRefGoogle Scholar
  22. Demirgüç-Kunt A, Levine R (1996) Stock markets, corporate finance, and economic growth: an overview. World Bank Econ Rev 10(2):223–239CrossRefGoogle Scholar
  23. Dziobek C, Gutierrez Mangas C, Kufa P (2011) Measuring fiscal decentralization—exploring the IMF-s databases. IMF Working Paper 126Google Scholar
  24. Escolano J, Eyraud L, Badia MM, Sarnes J, Tuladhar A (2012) Fiscal performance, institutional design and decentralization in European Union countries. IMF Working Paper 145Google Scholar
  25. Ezcurra R, Rodriguez-Pose A (2011) Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries. J Econ Geogr 10:619–644Google Scholar
  26. Fatas A, Mihov I (2001) Government size and automatic stabilisers: international and intranational evidence. J Int Econ 55(1):3–28CrossRefGoogle Scholar
  27. Fatas A, Mihov I (2003) The case for restricting fiscal policy discretion. Q J Econ 118:1419–1447CrossRefGoogle Scholar
  28. Fatas A, Mihov I (2005) Policy volatility, institutions and economic growth. CEPR Discussion Paper 5388Google Scholar
  29. Fisman R, Gatti R (2002) Decentralization and corruption: evidence across countries. J Public Econ 83(3):325–345CrossRefGoogle Scholar
  30. Fiva JH (2006) New evidence on the effect of fiscal decentralisation on the size and composition of government spending. FinanzArchiv 62(2):250–280CrossRefGoogle Scholar
  31. Foremny D (2014) Sub-national deficits in European countries: the impact of fiscal rules and tax autonomy. Eur J Polit Econ 34:86–110CrossRefGoogle Scholar
  32. Furceri D (2007) Is government expenditure volatility harmful for growth? A cross-country analysis. Fisc Stud 28(1):103–120CrossRefGoogle Scholar
  33. Furceri D, Karras G (2008) Business cycle volatility and country size: evidence for a sample of OECD countries. Econ Bull 5(3):1–7Google Scholar
  34. Furceri D, Ribeiro MP (2009) Government consumption volatility and the size of nations. OECD Working Paper No. 28Google Scholar
  35. Garrett G, Rodden J (2003) Globalization and fiscal decentralization. In: Kahler M, Lake DA (eds) Governance in a global economy: political authority in transition. Princeton University Press, Princeton, pp 87–109Google Scholar
  36. Gemmell N, Kneller R, Sanz I (2013) Fiscal decentralization and economic growth: spending versus revenue decentralization. Econ Inq 51(4):1915–1931CrossRefGoogle Scholar
  37. Hnatkovska V, Loayza N (2005) Volatility and growth. In: Aizenmann J, Pinto B (eds) Managing economic volatility and crises. Cambridge University Press, CambridgeGoogle Scholar
  38. Ivanyna M, Shah A (2012) How close is your government to its people. Policy Research Working Paper 6138. World BankGoogle Scholar
  39. Jin J, Zou H (2002) How does fiscal decentralisation affect aggregate, national, and subnational government size. J Urban Econ 52:270–293CrossRefGoogle Scholar
  40. King D, Ma Y (2001) Fiscal decentralization, central bank independence and inflation. Econ Lett 72:95–98CrossRefGoogle Scholar
  41. Kyriacou AP, Roca-Sagalés O (2011) Fiscal decentralisation and the quality of government in the OECD. Econ Lett 111(3):191–193CrossRefGoogle Scholar
  42. Letelier L (2005) Explaining fiscal decentralization. Public Finan Rev 33(2):155–183CrossRefGoogle Scholar
  43. Liberati P, Sacchi A (2013) Tax decentralization and local government size. Public Choice 157:183–205CrossRefGoogle Scholar
  44. Loayza NV, Ranciere R, Serven L, Ventura J (2007) Macroeconomic volatility and welfare in developing countries: an introduction. World Bank Econ Rev 21(3):343–357CrossRefGoogle Scholar
  45. Marlow M (1988) Fiscal decentralization and government size. Public Choice 56(3):259–269CrossRefGoogle Scholar
  46. Martinez-Vazquez J, McNab RM (2003) Fiscal decentralization and economic growth. World Dev 31:1597–1616CrossRefGoogle Scholar
  47. Mirman LJ (1971) Uncertainty and optimal consumption decisions. Economet J Economet Soc 179–185Google Scholar
  48. Musgrave RA (1959) The theory of public finance: a study in public economy. McGraw-Hill, New YorkGoogle Scholar
  49. Neyapti B (2010) Fiscal decentralization and deficits: international evidence. Eur J Polit Econ 26:155–166CrossRefGoogle Scholar
  50. Nishimura Y (2006) Human fallibility, complementarity, and fiscal decentralization. J Public Econ Theory 8(3):487–501CrossRefGoogle Scholar
  51. OECD (2009) Taxes and grants: on the revenue mix of sub-central governments. Working Paper 7, Network on Fiscal Relations Across Levels of Government, OECD, ParisGoogle Scholar
  52. OECD (2012) Decentralisation and economic growth. Network on Fiscal Relations Across Levels of Government, ParisGoogle Scholar
  53. Pagano M (1989) Endogenous market thinness and stock price volatility. Rev Econ Stud 56(2):269–287CrossRefGoogle Scholar
  54. Panizza U (1999) On the determinants of fiscal centralization: theory and evidence. J Public Econ 74(1):97–139CrossRefGoogle Scholar
  55. Pindyck RS (1991) Irreversibility, uncertainty, and investment. J Econ Lit 1110–1148Google Scholar
  56. Prohl S, Schneider F (2009) Does decentralisation reduce government size? A quantitative study of the decentralisation hypothesis. Public Finan Rev 37(6):639–664CrossRefGoogle Scholar
  57. Qian Y, Weingast BR (1997) Federalism as a commitment to perserving market incentives. J Econ Perspect 11(4):83–92CrossRefGoogle Scholar
  58. Ramey G, Ramey V (1995) Cross-country evidence on the link between volatility and growth. Am Econ Rev 85:1138–1151Google Scholar
  59. Ravn MO, Uhlig H (2002) On adjusting the Hodrick-Prescott filter for the frequency of observations. Rev Econ Stat 84:371–380CrossRefGoogle Scholar
  60. Rodden J (2003) Reviving Leviathan: fiscal federalism and the growth of government. Ind Organ 57(4):695–729Google Scholar
  61. Rose AK (2006) Size really doesn’t matter: in search of a national scale effect. J Jpn Int Econ 20(4):482–507CrossRefGoogle Scholar
  62. Sacchi A, Salotti S (2014) The effects of fiscal decentralization on household income inequality: some empirical evidence. Spat Econ Anal 9(2):202–222CrossRefGoogle Scholar
  63. Sacchi A, Salotti S (2015) The influence of decentralized taxes and intergovernmental grants on local spending volatility. Reg Stud. doi: 10.1080/00343404.2015.1111512, forthcoming Google Scholar
  64. Salmon P (1987) Decentralization as an incentive scheme. Oxf Rev Econ Policy 3(2):24–43CrossRefGoogle Scholar
  65. Sepulveda CF, Martinez-Vazquez J (2011) The consequences of fiscal decentralization on poverty and income equality. Environ Plan C Gov Policy 29:321–343CrossRefGoogle Scholar
  66. Shadbegian RJ (1999) Fiscal federalism, collusion, and government size: evidence from the states. Public Finan Rev 27(3):262–281CrossRefGoogle Scholar
  67. Shelton CA (2007) The size and composition of government expenditure. J Public Econ 91(11–12):2230–2260CrossRefGoogle Scholar
  68. Spolaore E (2008) National borders and the size of nations. In: Weingast B, Wittman D (eds) The Oxford handbook of political economy. Oxford University Press, Oxford, pp 778–798Google Scholar
  69. Stegarescu D (2005) Public sector decentralisation: measurement concepts and recent international trends. Fisc Stud 26(3):301–333CrossRefGoogle Scholar
  70. Stegarescu D (2009) The effects of economic and political integration on fiscal decentralisation: evidence from OECD countries. Can J Econ 42(2):694–718CrossRefGoogle Scholar
  71. Stein E (1999) Fiscal decentralization and government size in Latin America. J Appl Econ 2:357–391Google Scholar
  72. Ter-Minassian T (1997) Fiscal federalism in theory and practice. International Monetary Fund, Washington D.CGoogle Scholar
  73. Thieben U (2003) Fiscal decentralization and economic growth in high-income OECD countries. Fisc Stud 24(3):237–274Google Scholar
  74. Thornton J (2007) Fiscal decentralization and economic growth reconsidered. J Urban Econ 61(1):64–70CrossRefGoogle Scholar
  75. Tochkov K (2007) Interregional transfers and the smoothing of provincial expenditure in China. China Econ Rev 18(1):54–65CrossRefGoogle Scholar
  76. Weingast BR (2014) Second generation fiscal federalism: political aspects of decentralization and economic development. World Dev 53:14–25CrossRefGoogle Scholar
  77. Wibbels E (2000) Federalism and the politics of macroeconomic policy and performance. Am J Polit Sci 687–702Google Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Davide Furceri
    • 1
    • 2
    Email author
  • Agnese Sacchi
    • 3
    • 4
  • Simone Salotti
    • 5
  1. 1.International Monetary Fund, Research DepartmentWashington D.C.USA
  2. 2.University of PalermoPalermoItaly
  3. 3.Universitas MercatorumRomeItaly
  4. 4.Governance and Economics research Network, GENOurenseSpain
  5. 5.European Commission, Joint Research Centre (JRC), Institute for Prospective Technological Studies (IPTS)SevilleSpain

Personalised recommendations