Beyond the Fiction of Federalism: Macroeconomic Management in Multitiered Systems

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 and fiscal structures that are likely to account for the highly divergent economic experiences of federal systems around the world. To test these propositions, the authors use an original data set to conduct analyses of budget balance and inflation in fifteen federations around 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 findings have broad implications for the widespread move toward greater decentralization and for the theoretical literatures on federalism and macroeconomics.