Asymmetric Decentralization,Intergovernmental Transfers,and Expenditure Policies of Local Governments

Although China’s asymmetric fiscal decentralization system has been criticized for many years, there have been few studies giving direct evidence of its negative incentives on local government spending policies. By introducing the mechanism of asymmetric decentralization and fiscal transfers to the objective function of local government, this paper studies the incentive effects of asymmetric decentralization and fiscal transfers on spending policies of local governments, and uses the provincial panel data to carry out an empirical test. The conclusion shows that the asymmetric decentralization significantly weakens the incentives of local government to increase social expenditure, and as a solution to asymmetric decentralization, fiscal transfers fail to play a good role. Due to the relatively large income effect, the financing mechanism of fiscal transfers not only significantly reduces the incentives of local government to provide social public goods, but also weakens the constraint effect of fiscal competition on expenditure policies of local governments because of the increase in the relative cost. Although the distribution mechanism of fiscal transfers has a significant positive incentive to local government in regions where the net inflow of fiscal resources is more than zero, because of common pooling effects, the comprehensive effects of fiscal transfers in the distribution of incentives of local governments to provide social public goods are negative in all regions.     

Fiscal Policy and Equitable Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general-equilibrium model with given exogenous fiscal policy, a nonmonotonic relation exists between the suboptimal long-run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two properties suggest that an alternative set of government policy instruments affects the response of private sector investment to fiscal policy. Moreover, the different properties of exogenous and endogenous fiscal policy theoretically account for the difference in the relation between economic growth and fiscal policy in empirical studies.     

The general equilibrium effects of fiscal policy: Estimates for the Euro area

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the Euro area. The model takes into account distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees and transfers to households. A newly computed quarterly data set of fiscal variables is used. Our results point to the prevalence of mild Keynesian effects of public expenditures. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensations for public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. The effects are more significant on the revenue side: decreases in labor income and consumption tax rates have sizeable effects on consumption and output, while a reduction in capital income tax favors investment and output in the medium run. Finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables.     

Stabilization policy,infrastructure investment,and welfare in a small open economy

Using a two-sector neoclassical growth model in an open economy setting with heterogeneous agents, this paper studies the distributional effects and welfare implications of a joint monetary and fiscal policy response to public infrastructure expansion in emerging market economies. The results show that fiscal stabilization policy is critical for achieving fiscal sustainability and price stability. With joint support of monetary and fiscal policy, government infrastructure investment provides significant welfare gains to the economy, and the choice of fiscal instruments has major distributional effects across agents: saving households accrue the highest welfare gains with new bond issuance, while hand-to-mouth consumers are better off when non-distorting taxes are adjusted. These potential tradeoffs in welfare due to households’ differing responses to infrastructure expansion have important implications for policy making.     

EVALUATING THE DISTRIBUTIONAL EFFECTS OF FISCAL POLICIES USING QUANTILE REGRESSIONS

The objective of this paper is to propose and apply a new method to evaluate the distributional impact of fiscal policies and potential marginal reforms. The econometric tool adopted is structural quantile treatment effects regression, which allows a complete picture of the effects of the fiscal policy of interest on households with different incomes, abilities, and needs. We apply this method to personal income taxation and non‐cash transfers in Italy for the year 2004. Our estimates suggest that, although heterogeneous, the redistributive effects of the potential fiscal reforms are almost zero.     

A model of income transfers for the urban poor

In developing nations cash transfers between households play a role in maintaining poor urban families at income levels sufficient to meet expenditures on basic needs. In our analysis, a social network is seen as redistributing income to those member households who fall below a perceived basic needs threshold. This redistributive mechanism can be though of as the outcome of an implicit social contract whereby households insure themselves against the risk of falling below a perceived basic needs level. Using data from El Salvador, regression estimates which account for transfers received by poor households are found to be consistent with the proposed model.     

EFFECTS OF TAXES AND BENEFITS ON INCOME DISTRIBUTION IN KOREA

This paper examines the redistributive effects of Korea's fiscal policies, including consumption taxes and in‐kind benefits. Using the Household Income and Expenditure Survey of 2007, we find that taxes and transfers reduce income inequality in Korea by 13.8 percent. Contrary to the popular belief that direct taxes are the key tool for redistribution, in‐kind benefits, direct taxes, and social security contributions all decrease the Gini coefficient by 6.7, 4.7, and 2.9 percentage points, respectively. The redistributive effect of consumption taxes is small and negative (?0.5 percentage point). Policy simulations indicate that education spending financed by the personal income tax has a positive redistributive effect and that the lower 70 percent of households enjoy positive net benefits. Spending targeting the poor has a strong redistributive effect, which implies low popularity because the majority of households face net losses.     

Bequests as signals: Implications for fiscal policy

This paper explores how bequests affect redistributive fiscal policies. The main premise underlying our approach is that bequests act as a signal of parental affection. It is shown that private transfers in the form of bequests may not offset public transfers to a significant extent, even though such private transfers are altruistically motivated and are strictly positive for all but a negligible set of households. This is notable since these conditions are normally believed to yield a fully offsetting response (Ricardian equivalence). We explicitly identify circumstances under which the departure from Ricardian equivalence is large. Notably, the departure may be quite large even when our model is observationally very close to one in which Ricardian equivalence is known to hold (in the sense that children care very little about parental affection).     

Debt Stabilizing Fiscal Rules

Unstable government debt dynamics can typically be stabilized around a certain target level of debt by adjustments in various fiscal instruments, like government spending, transfers, or taxes. This paper investigates properties of debt stabilizing rules which link the needed budgetary adjustments to the state of the economy. The paper establishes that the magnitude of the target level of long‐run debt is a key determinant of whether it is possible to find a rule of this type that can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical target level of debt beyond which this is no longer possible. From an applied perspective, this finding is of particular relevance in the context of a monetary union with decentralized fiscal policies. Depending on the target level of debt, there might be a conflict between a common fiscal framework that tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level.     

Options and strategies for fiscal consolidation in India

This paper uses a multi-region dynamic stochastic general equilibrium (DSGE) model to study options and strategies for fiscal consolidation in India. The challenge for India is how to put public finances on a more sustainable footing while preserving the potential for high growth and attenuating the adverse consequences on the needy. We analyze the macroeconomic implications of three fiscal consolidation scenarios. A “benchmark” case based on authorities' intentions that reduces government consumption, general transfers, and strengthens consumption tax collection; a “growth-friendly” that reallocates the savings to more public investment; and a “social-friendly” scenario that equally reallocates the savings between more public investment and more transfers to households excluded from the financial system. The simulations indicate that fiscal consolidation yields considerable long-term benefits and also entails output costs in the near term. Growth outcomes are better under the growth-friendly and social-friendly scenarios. These consolidation scenarios alone are not enough to maximize net gains for India. Other factors, such as the pace of consolidation, the combination with structural reforms and external economic conditions, play a critical role in the success of fiscal consolidation.     

Inflation and the fiscal limit

We use a rational expectations framework to assess the implications of rising debt in an environment with a “fiscal limit”. The fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes, so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt. We give households a joint probability distribution over the various policy adjustments that may occur, as well as over the timing of when the fiscal limit is hit. One policy option that stabilizes debt is a passive monetary policy, which generates a burst of inflation that devalues the existing nominal debt stock. The probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target. The distribution of outcomes for the path of future inflation has a fat right tail, revealing that only a small set of outcomes imply dire inflationary scenarios. Avoiding these scenarios, however, requires the fiscal authority to renege on some share of future promised transfers.     

Fiscal federalism in rentier regions: Evidence from Russia

When does sub-national fiscal autonomy prompt regional growth and recovery and, under what conditions, does it have adverse effects? We argue that unearned income streams, particularly in the form of revenues from natural resource production or from budgetary transfers from the central government, transform regions dependent on these income sources into rentier regions. Governments in these regions can use local control over revenues and expenditures to shelter certain firms, i.e., natural resource producers or loss-making enterprises, from market forces. Using fiscal data from 80 Russian regions from 1996 to 1999, we test this hypothesis in both cross-sectional and panel specifications. Our results indicate that tax retention, which is a proxy for fiscal autonomy, has had a positive effect on regional reform and investment since the break-up of the Soviet Union. However, we also find that this effect decreases as rentable income streams to regions increase. Journal of Comparative Economics 33 (4) (2005) 814–834.     

FISCAL POLICY IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL AND POLLUTION

This paper studies the growth and welfare effects of fiscal policy in an endogenous growth model with public capital and environmental pollution. I assume that pollution is due to aggregate production, and that it does not have a direct effect on production but only reduces household utility. I study the growth effects of fiscal policy for the model on the balanced growth path, taking transition dynamics into account. I then analyse the welfare effects of fiscal policy along the balanced growth path. Finally, I show how the fiscal parameters must be set so that the competitive economy replicates the social optimum.     

How much to share: Welfare effects of fiscal transfers

Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short‐run transitional welfare loss can outweigh the long‐run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.     

Distributional Effects of Fiscal Consolidation

If public goods and transfers are relatively more valuable to the poor, the elderly poor stand to lose from public debt reduction achieved through spending cuts. When long–term surpluses produced by debt reduction are recycled into higher provision of public goods and transfers, future generations of poor could gain. If future surpluses are recycled through lower labour taxes, working households in the future would be positively affected. The impact of debt reduction on vertical equity is ambiguous, yet inter– rather than intragenerational equity is likely to pose the greatest obstacle to fiscal consolidation. Based on majority voting by self–interested households, debt reduction is unlikely to occur.
JEL classification : D 91; E 62; H 23; H 63     

Fiscal policy in an endogenous-growth model with public investment: A note

This note extends the basic endogenous-growth model by Barro [Journal of Political Economy (1990) 98: S103–S125]. It is supposed that the government pays lump-sum transfers to the representative household or levies a lump-sum tax, besides financing public investment. Growth and welfare effects of fiscal policy are studied for the competitive economy and the growth rate of the social optimum is compared with the one of the competitive economy.     

Strategic Inter–Regional Transfers

We derive the equilibrium level of redistribution from one mobile factor (say, the rich or capital) to another possibly mobile factor (say, the poor or labour) when regions choose both their inter–regional transfers and redistributive policies non–cooperatively. It is shown that inter–regional transfers are always desirable (to mitigate the fiscal competition), but cannot be sustained (as a Nash equilibrium) when chosen simultaneoulsy with the redistributive policy. On the other hand, if regions can pre–commit to inter–regional transfers before setting their redistributive policy, their strategic effect makes efficient inter–regional transfers sustainable. However, there are also equilibria with inefficiently small inter–regional transfers or no transfers at all. The effects of regional asymmetries and additional regions on these results are also analyzed.     

Fiscal federalism in monetary unions: hypothetical fiscal transfers within the Euro-zone

Net fiscal transfers are commonly seen as a possible means to ensure the well-functioning of a currency area. We show that US net fiscal transfers, measured as the difference between gross federal revenues and federal expenditures per state, are enormous. Moreover, we run panel regressions that suggest their dependence on relative GDP and relative GDP growth during crisis periods, evidence of net fiscal transfers from relatively rich to relatively poor states (redistributive effect) and to states with an underperforming economic development (stabilization effect). The Euro-zone (EZ) lacks a system of fiscal federalism, which raises the question of whether it should be established in the medium- and long-run. If so, which should be the magnitude of net fiscal transfers? We calculate these transfers hypothetically for 1999–2010, using a relative volume comparable to the one in the USA.     

Social norms and gift behavior: Theory and evidence from Romania

In many developing and transitional countries with limited public income redistribution, inter-household transfers in general, and gifts in particular, are sizable and very important. We use unique Romanian survey data that enables us to isolate pure gifts from other private transfers. We explicitly focus on the importance of community-wide social norms, and find that they indeed play a major role for both the occurrence and the values of gifts. More exactly, our results suggest that the overall predominant gift motive among Romanian households is a norm of reciprocity. Moreover, this norm seems to be dominating for gifts to middle- and high-income households. Even though poor households receive to the same extent, norms of both impure altruism and reciprocity tend to be important. Hence, although the poor may not reciprocate gifts to the same extent as the rich, they still receive, since there is a social norm to give, especially to the poor.     

A decomposition theorem for income redistribution policies

Income redistribution policies are examined in a model where households differ from each other in a vector of characteristics. It is shown that any redistribution policy can be expressed as the sum of a set of policies, each of which transfers income only within cohorts of households that are identical in all characteristics except one.