Stabilizing the Economy in a Multilevel Government: the role of Spanish Regional Governments

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Stabilizing the Economy in a Multilevel Government: the role of Spanish Regional Governments

Juan E. Castañeda; Ana Herrero-Alcalde ; José Manuel Tránchez-Martín ; Jordi Vila-Vila

Decentralization processes have taken place all over the world in the last few decades. This has led to an increasing macroeconomic impact of sub-central government budgets. Normative literature on the role of sub-central governments on the implementation of stabilization policies is abundant. However, there is still little empirical evidence addressing the bias of sub-central budgets regarding the macroeconomic performance in their territories. Using a fiscal reaction function, a pool of data covering all the regional governments in Spain, and after adjusting the regional budget balance for inertia and the business cycle, we find empirical evidence of the countercyclical bias of Spanish regional governments fiscal policies during the period 1984-2014. This is in sharp contrast with the scarce previous literature on this filed.