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Intergovernmental transfers and dynamic adjustment of subnational budgets

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  • Alberto Porto
  • Jorge Puig
  • Bautista Vidal

Abstract

We study the dynamic impact of intergovernmental transfers on subnational budgets. Unlike the abundant literature that focuses on local governments, in this paper we study intermediate governments. Using the ideal case of a multi-level government like Argentina, and methods for dynamic analysis, we disentangled the nature of subnational fiscal adjustments that follow a shock in federal transfers. In the short run, transfers lead to a more than proportional increase in spending, while own-source revenues rise slightly, resulting in a deficit. In the long-run, provinces recover fiscal equilibrium by adjusting spending and taxes to a level consistent with a balanced budget. The steady-state equilibrium involves a higher level of spending, as transfers increase endogenously as a result of cross-regional spillover effects. We also provide a potential mechanisms driving fiscal adjustments and explore relevant extensions that consider regional disparities and different types of taxes, spending, and transfers used to balance subnational budgets. Overall, the paper offers valuable insights for designing subnational fiscal policy.

Suggested Citation

  • Alberto Porto & Jorge Puig & Bautista Vidal, 2025. "Intergovernmental transfers and dynamic adjustment of subnational budgets," CEFIP, Working Papers 049, CEFIP, Universidad Nacional de La Plata.
    • Handle: RePEc:akh:wcefip:049
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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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