Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/22969
Authors: 
Crivelli, Ernesto
Year of Publication: 
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

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