Working Paper: CEPR ID: DP1984
Authors: Tamim Bayoumi; Paul R. Masson
Abstract: This paper looks at theoretical and empirical issues associated with the operation of fiscal stabilizers within an economy. It argues that such stabilizers operate most effectively at a national, rather than local, level. As differing cycles across regions tend to offset each other for the country as a whole, national fiscal stabilizers are not associated with the same increase in future tax liabilities for the region as local ones. Accordingly, the negative impact from the Ricardian effects associated with these tax liabilities is smaller. Empirical work on data across Canadian provinces indicates that local stabilizers are only one-third to one-half as effective as national stabilizers which create no future tax liability.
Keywords: Fiscal Stabilization; Levels of Government; Ricardian Equivalence
JEL Codes: E63; H31; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local stabilizers (C62) | future tax liabilities (H29) |
| future tax liabilities (H29) | Ricardian offset in private consumption (E21) |
| national fiscal stabilizers (E63) | private consumption (D19) |
| local fiscal stabilizers (H79) | private consumption (D19) |
| liability-creating fiscal deficits (H69) | private consumption (D19) |
| non-liability-creating fiscal deficits (H69) | private consumption (D19) |
| federal deficit (H62) | private consumption (D19) |
| provincial deficit (H69) | private consumption (D19) |