The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations

By Tigran Poghosyan, Abdelhak S Senhadji, Carlo Cottarelli

July 21, 2016

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Tigran Poghosyan, Abdelhak S Senhadji, and Carlo Cottarelli. The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations, (USA: International Monetary Fund, 2016) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We assess the extent to which fiscal transfers smooth regional shocks in three large federations: the U.S., 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.

Subject: Disposable income, Fiscal federalism, Fiscal policy, Fiscal transfers, National accounts, Personal income

Keywords: Coefficient estimate, Confidence level, Disposable income, Estimation result, Fiscal federalism, Fiscal transfers, Global, OLS estimator, Per capita income, Personal income, Potential GDP, Redistribution, Redistribution effect, Redistribution estimate, Risk pooling, Risk-sharing, Risk-sharing estimate, Two-step estimation method, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/141
Stock No:

WPIEA2016141
ISBN:

9781498379601
ISSN:

1018-5941

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