Template-Type: ReDIF-Paper 1.0

Author-Name: Alberto Porto
Author-X-Name-First: Alberto 
Author-X-Name-Last: Porto

Author-Name: Jorge Puig
Author-X-Name-First: Jorge 
Author-X-Name-Last: Puig

Author-Name: Bautista Vidal
Author-X-Name-First: Bautista 
Author-X-Name-Last: Vidal

Title: Intergovernmental transfers and dynamic adjustment of subnational budgets

Abstract: We study the dynamic impact of intergovernmental transfers on subnational budgets.  Unlike the abundant literature that focuses on local governments, in this paper we study intermediate governments. Using the ideal case of a multi-level government like Argentina, and methods for dynamic analysis, we disentangled the nature of subnational fiscal adjustments that follow a shock in federal transfers. In the short run, transfers lead to a more than proportional increase in spending, while own-source revenues rise slightly, resulting in a deficit. In the long-run, provinces recover fiscal equilibrium by adjusting spending and taxes to a level consistent with a balanced budget. The steady-state equilibrium involves a higher level of spending, as transfers increase endogenously as a result of cross-regional spillover effects. We also provide a potential mechanisms driving fiscal adjustments and explore relevant extensions that consider regional disparities and different types of taxes, spending, and transfers used to balance subnational budgets. Overall, the paper offers valuable insights for designing subnational fiscal policy.

Length: 45 pages

Creation-Date:  2025-01
File-URL: https://cefip.econo.unlp.edu.ar/wp-content/uploads/2025/02/DocTrab49.pdf
File-Format: Application/pdf
Classification-JEL: D72, H11, H20, H50, H77
Handle: RePEc:akh:wcefip:049