Intergovernmental Transfers: Are they pro- or counter-cyclical?

This note describes an empirical analysis to measure the cyclical properties of intergovernmental transfers. By modelling a fiscal policy reaction function, the paper tests whether transfers systems in 25 member countries of the Organisation for Economic Co-operation and Development (OECD) are pro-or counter-cyclical, i.e. whether they offset cyclical fluctuations of sub-central economies or, on the contrary, exacerbate them. Regression results suggest that transfer systems tend to be pro-cyclical in general and in more than half of OECD countries and tend to destabilise sub-central economies. Pro-cyclical grants hence often exacerbate the pro-cyclicality of sub-central fiscal policy. Transfer pro-cyclicality may be the result of several factors: Transfer spending is often a fixed share of central government tax revenue which itself tends to be pro-cyclical. Moreover, many grants are matching sub-central spending and hence tend to increase when sub-central spending rises. Finally, reform proposals are presented to make transfer systems less cyclical and more stabilising.

Keywords: Fiscal federalism, stabilisation, intergovernmental transfers, pro-cyclicality

Jel codes: H42, H50, H77

• Redistribution and risk-sharing effects of intergovernmental transfers: an empirical analysis based on Italian municipal data Giampaolo Arachi, Francesco Porcelli, Alberto Zanardi, in Regional Studies /2023 pp.1523
  DOI: 10.1080/00343404.2022.2149726

Hansjörg Blöchliger, Balázs Égert, Intergovernmental Transfers: Are they pro- or counter-cyclical? in "ECONOMIA PUBBLICA " 3/2017, pp 5-20, DOI: 10.3280/EP2017-003001