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Title:Sub-National Optimal Budget Allocation and Borrowing under Soft Budget Constraint PDF Logo
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
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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