Macroeconomic Instability and Fiscal Decentralization: An Empirical Analysis

The main objective of this paper is to fill a critical gap in the literature by analyzing the effects of decentralization on the macroeconomic stability. A survey of the voluminous literature on decentralization suggests that the question of the links between decentralization and macroeconomic stability has been relatively scantily analyzed. Even though there is still a lot of room for analysis as far as the effects of decentralization on other aspects of the economy are concerned, we believed that it is in this area that a more thorough analyses are mostly called for. Through this paper, we will try to shed more light on the issue notably by looking at other dimension of macroeconomic stability than the ones usually employed in previous studies as well as by examining other factors that might accentuate or diminish the effects of decentralization on macroeconomic stability. Our results found that decentralization appears to lead to a decrease in inflation rate. However, we do not find any correlation between decentralization with the level of fiscal deficit. Our results also show that the impact of decentralization on inflation is conditional on the level of perceived corruption and political institutions. Reprinted by permission of the University of Economics, Prague