Fiscal Federalism in Four Federal Countries

This paper provides a characterization of the fiscal policy framework in four established federal countries with heterogeneous intergovernmental relations and demographic characteristics: Canada, Germany, Switzerland and the United States. We consider the implications of fiscal federalism from three different perspectives. First, we study the allocation of expenditure responsibilities and revenue generating instruments to different levels of government (federal, state and local) and discuss the role of intergovernmental transfers schemes and fiscal rules in each country. Second, we study the implementation of macroeconomic stabilization policy across different levels of government. Third, we discuss the evidence on the degree of inter-state risk sharing and the role of federal transfers in smoothing regional income shocks in federal countries. We conclude with the main implications to the euro area and to the debate on common fiscal instruments.