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Post-crisis Fiscal Policy$
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Carlo Cottarelli, Philip Gerson, and Abdelhak Senhadji

Print publication date: 2014

Print ISBN-13: 9780262027182

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262027182.001.0001

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Impact of the Crisis and Policy Response at the Sub-National Level

Impact of the Crisis and Policy Response at the Sub-National Level

(p.407) 15 Impact of the Crisis and Policy Response at the Sub-National Level
Post-crisis Fiscal Policy

Borja Gracia

Jimmy McHugh

Tigran Poghosyan

The MIT Press

This chapter examines the impact of the 2007 financial crisis on subnational governments (SNGs) using disaggregated state level data for eight large highly decentralized countries: Australia, Brazil, Canada, China, Germany, Mexico, Spain, and the United States. It shows that the crisis adversely affected SNG finances in advanced economies, primarily through a pronounced reduction in output, which in turn generated a decline in own revenues. SNGs in emerging market economies were less affected as economic activity held up comparatively well. The chapter also considers the short-run policy response of SNGs. In general, SNGs resorted to fiscal policy countercyclicality, maintaining and in some cases increasing expenditure levels, compared to the pre-crisis period, owing to transfers from the central government in the context of national fiscal stimulus packages. At the same time, there was some limited relaxation of SNG budget rules and borrowing constraints. The crisis exacerbated long-run sustainability challenges for many SNGs. A considerable part of revenue declines was structural.

Keywords:   financial crisis, subnational governments, output, finances, revenues, central government, fiscal stimulus, borrowing, fiscal policy, countercyclicality

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