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Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany

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  • Büttner, Thiess

Abstract

In the context of EMU fiscal equalization schemes have been proposed as a means to stabilize regions against asymmetric shocks. A theoretical analysis shows that besides reducing the cross-sectional income variance the redistributive element of fiscal equalization causes incentive effects for regional governments, undermining the efficient supply of public goods. Yet, this objection is shown to be less important in a situation of insufficient demand, where interregional redistribution actually favors stabilization. In an empirical analysis for Germany, the paper adds support for the finding of significant regional stabilization by fiscal flows. The results indicate that about 17 % of GDP variation across West Germany's states has been removed by fiscal flows during the last two decades. Thus, in Germany where the fiscal federalism is criticised for its heavy equalization the extent of regional stabilization provided by fiscal flows is quite similar to other federal countries.

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  • Büttner, Thiess, 1999. "Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany," ZEW Discussion Papers 99-23, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5511
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    1. Ralf Hepp & Jürgen von Hagen, 2012. "Fiscal Federalism in Germany: Stabilization and Redistribution Before and After Unification," Publius: The Journal of Federalism, CSF Associates Inc., vol. 42(2), pages 234-259, April.
    2. Patrick A. Puhani, 2001. "Labour Mobility: An Adjustment Mechanism in Euroland? Empirical Evidence for Western Germany, France and Italy," German Economic Review, Verein für Socialpolitik, vol. 2(2), pages 127-140, May.
    3. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
    4. Ralf Hepp & Jürgen von Hagen, 2013. "Interstate risk sharing in Germany: 1970--2006," Oxford Economic Papers, Oxford University Press, vol. 65(1), pages 1-24, January.
    5. Müller, Claudia & Buscher, Herbert S., 1999. "The impact of monetary instruments on shock absorption in EU-Countries," ZEW Discussion Papers 99-15, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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