Beyond the Fiction of Federalism: Macroeconomic Management in Multitiered Systems

TLDR

Recent studies on federalism are sharply divided, with some praising its market‑preserving benefits while others highlight policy fragmentation and incoherence. This study seeks to reconcile these views by examining the political and fiscal structures that explain the divergent macroeconomic outcomes of federal systems worldwide. The authors analyze budget balance and inflation data from 1978‑1996 across fifteen federations using an original dataset. Fiscal decentralization, intergovernmental finance arrangements, and vertical partisan relations jointly shape macroeconomic performance, underscoring implications for decentralization trends and federalism theory.

Abstract

Recent research on federalism is extremely divided. While some tout the benefits of “market-preserving” federalism, others point to the fragmentation and incoherence of policy in federal states. This research bridges the divide by analyzing the political andfiscalstructures that are likely to account for the highly divergent economic experiences of federal systems around die world. To test these propositions, the authors use an original data set to conduct analyses of budget balance and inflation infifteenfederationsaround the world from 1978 through 1996. The empirical research suggests that the level of fiscal decentralization, the nature of intergovernmental finance, and vertical partisan relations all influence macroeconomic outcomes. The find- ings have broad implications for the widespread move toward greater decentralization and for the theoretical literatures on federalism and macroeconomics.