Do federal deficits motivate regional fiscal (im)balances? Evidence from the Spanish case.

Abstract

This paper studies the vertical and horizontal interactions existing between federal and state governments in terms of public deficits. We estimate a fiscal reaction function for the Spanish regions over the period 1995-2010 paying special attention to the impact of federal fiscal stance on the state fiscal imbalances. Our results indicate that higher public deficits of the central government encourage bigger fiscal imbalances at state level. This vertical interaction is interpreted in the context of yardstick competition models. We also find a significant impact of fiscal decisions taken by governments at the same tier of decision on a specific state.public deficit, intergovernmental relations, yardstick competition