The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
Download PDF: Working Paper 18
This paper assesses the extent to which fiscal transfers smooth regional shocks in three large federations: the US, Canada and Australia
Authors: Tigran Poghosyan, Abdelhak Senhadji and Carlo Cottarelli | International Monetary Fund
Paper presented at ADEMU (A Dynamic Economic and Monetary Union) conference co-organised by the ESM in May 2016
Abstract:
This paper assesses the extent to which fiscal transfers smooth regional shocks in three large federations: the US, 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.
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JEL codes: E6, C4, H6