Abstract
The level at which stabilization policy is performed is shown to matter for its effectiveness. In particular, in a national (e.g. Canadian) context, Ricardian equivalence is expected to operate more fully at the provincial level than the national level, because at the national level those receiving benefits are not necessarily those paying the taxes — there is an element of redistribution across provinces. Alternatively, one can distinguish between debt-creating and non-debt-creating fiscal flows; only the latter produce a Ricardian offset. Since the excess of federal spending over taxes in a particular province is partially balanced by surpluses elsewhere, federal fiscal policy should stabilize provincial consumption more effectively than similar policies carried out by provincial governments. Panel regressions suggest that the federal stabilizing role is more than twice that of provincial governments in Canada.
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Bayoumi, T., Masson, P.R. (1997). The Efficiency of National and Regional Stabilization Policies. In: Hairault, JO., Hénin, PY., Portier, F. (eds) Business Cycles and Macroeconomic Stability. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-6173-6_6
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