The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
IMF Working Papers, July 21, 2016
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- The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations
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Bibliographic details
- Authors: Tigran Poghosyan, Abdelhak S Senhadji, Carlo Cottarelli
- Published: July 21, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498379601.001
Key findings
- Fiscal transfers offset 4-11 percent of idiosyncratic shocks (risk-sharing).
- Fiscal transfers offset 13-24 percent of permanent shocks (redistribution).
- Fiscal insurance operates largely through automatic stabilizers embedded in a central budget primarily via federal taxes and transfers to individuals, rather than transfers from the central government to state budgets.
- Results are derived from analysis of three large federations: the U.S., Canada, and Australia.
- These results have implications for the design of fiscal risk-sharing mechanisms in the euro area.
Methodology and scope
- Countries analyzed: the U.S., Canada, and Australia.
- Estimation and empirical approach referenced in keywords: coefficient estimate, confidence level, OLS estimator, two-step estimation method, estimation result.
- Outcome measures and concepts emphasized: Disposable income, per capita income, Personal income, potential GDP, redistribution effect, risk pooling, risk-sharing estimate, redistribution estimate.
Policy implications and interpretation
- Fiscal risk-sharing provided by central budgets appears to be concentrated in automatic stabilizers (federal taxes and transfers to individuals) rather than direct central-to-state budget transfers.
- Design of fiscal risk-sharing mechanisms (for example, in the euro area) should consider the relative roles of automatic stabilizers versus discretionary intergovernmental transfers.
- Redistribution and insurance effects are quantifiable and distinct: the estimated range for risk-sharing is 4-11 percent, while redistribution is 13-24 percent—both should inform policy choices on federal fiscal architecture.
Additional publication notes
- Series: Working Paper No. 2016/141.
- DOI: https://doi.org/10.5089/9781498379601.001
- Pages: 34
- Authors: Tigran Poghosyan, Abdelhak S Senhadji, Carlo Cottarelli
- Date: July 21, 2016
Source: IMF Working Paper "The Role of Fiscal Transfers in Smoothing Regional Shocks: Evidence from Existing Federations" by Tigran Poghosyan, Abdelhak S Senhadji, and Carlo Cottarelli (July 21, 2016).