What is it about?
How does fiscal devolution affect the probability of a sovereign debt crisis? Using annual cross-country panel data from 82 advanced and developing countries, the association between the sovereign debt crisis and fiscal decentralization is investigated. We employ an instrumental variable probit model to address endogeneity.
Featured Image
Photo by Hansjörg Keller on Unsplash
Why is it important?
Many countries have multiple tiers of government, and various public goods are provided by different levels of government. Many public services are decentralized to subnational governments with intergovernmental transfers from the central government all over the world. Fiscal decentralization is also a policy change in developing countries that is frequently advocated by international agencies and bilateral donors. The decentralization of fiscal operations could affect the efficiency of public service delivery and fiscal sustainability by changing fiscal discipline.
Perspectives
Local tax autonomy reduces the probability of a sovereign debt crisis, while expenditure devolution increases crisis probability. The favorable and unfavorable effects of fiscal devolution are more evident in the case of decentralization to local governments than decentralization to subnational ones. In terms of relative magnitudes, the undesirable effects of expenditure decentralization are greater than the desirable effects of tax revenue one. Thus, countries should be cautious about risks associated with fiscal devolution, particularly the contrasting impact of tax revenue and spending decentralization on the likelihood that sovereign debt crises occur.
Dr. Ryota Nakatani
International Monetary Fund
Read the Original
This page is a summary of: Sovereign Debt Crisis and Fiscal Devolution, November 2023, MDPI AG,
DOI: 10.20944/preprints202311.1367.v1.
You can read the full text:
Contributors
The following have contributed to this page
