DOI 10.1007/s10797-006-8948-1 Fiscal decentralization and macroeconomic management

Abstract The purpose of this paper is to address a central question in fiscal federalism-whether or not fiscal decentralization implies serious risks for fiscal discipline and macroeconomic management for the nation as a whole. This paper addresses this im-portant issue by drawing upon the existing evidence regarding macro management and fiscal institutions in federal and unitary countries. This is supplemented by cross coun-try regression analysis plus the analysis of two case studies: the Brazilian federation and the unitary regime in China. The main conclusion of the paper is that decentralized fiscal systems offer a greater potential for improved macroeconomic governance than centralized fiscal regimes. This is because the challenges posed by fiscal decentraliza-tion are recognized and they shape the design of countervailing institutions in federal countries to overcome adverse incentives associated with incomplete contracts or the “common property ” resource management problems or with rent seeking behaviors