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Bonn Graduate School of Economics (BGSE), Universität Bonn >
Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn >
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http://hdl.handle.net/10419/22969
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| Title: | | Sub-National Optimal Budget Allocation and Borrowing under Soft Budget Constraint  |
| Authors: | | Crivelli, Ernesto |
| Issue Date: | | 2006 |
| Series/Report no.: | | Bonn econ discussion papers 2006,24 |
| Abstract: | | Local governments have borrowed largely from the banking system to finance their deficits instead of responding to the rigors of bond markets. This paper analizes how sub-national governments optimally reallocate the provision of public goods and decide on borrowing, in a model where the banking system faces a soft budget constraint. In contrast with recent literature, sub-national governments allocate a higher (lower) than optimal amount of resources to consumption public goods (infrastructure investment) and overborrow if they expect the banking system to be bailed out. Controls on sub-national borrowing like the golden rule seem to be inefficient to avoid excesive indebtedness at state level. |
| Subjects: | | Fiscal federalism soft budget constraints local public investment sub-national borrowing |
| JEL: | | R5 H7 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn
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