Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.
This paper contributes to a developing literature that examines financial interactions between different levels of government. More specifically, we investigate the use of grants, shared tax revenues, and their impact on fiscal outcomes, including decentralized service provision. Most existing empirical evidence has focused on individual country studies, and has predominantly been US based. However, it is difficult to generalize the conclusions obtained for the US to countries where the position and remit of lower tiers of government has recently been evolving or is less clear constitutionally. We use a panel dataset covering 15 OECD countries to investigate how central and sub-central expenditures, taxation, and intergovernmental grants change in response to central governments' attempts to correct their fiscal positions. We adopt an event study methodology to examine the timing of expenditure, taxation and intergovernmental grant shifts around the periods of fiscal consolidation. In addition to highlighting issues regarding the interaction between central and sub-central tiers of government, our analysis also sheds light into the extent to which sub-central tiers of government participate in fiscal consolidations, and hence to macroeconomic adjustment. Our key results can be summarized as follows. First, successful fiscal consolidations are generally driven by similar, and sustained, falls in expenditure at both central and sub-central tiers. Moreover, our evidence counters that identified by Gramlich (1987) for the USA, in that when central governments cut intergovernmental grants sub-central tiers do not take redress through offsetting increases in other forms of revenues. Second, unsuccessful consolidations tend to be characterized by increased central government taxation, with no fall back in grants and no tendency for sub-central taxation to change. It does appear that there is strong correlation between success in consolidating central fiscal deficits and similar actions from lower tiers of government. Third, we find that where consolidations are successful sub-central tiers of government are typically forced to cut back on capital expenditure. This suggests that in this regard the burden of adjustment falls onto lower tiers of government and central governments worry less about the long-term (i.e. public investment) consequences of consolidation if these decisions are taken at local level. We also find that when faced with cuts in intergovernmental grants, sub-central governments tend to maintain expenditures on wages at the expense of capital expenditure, reflecting a definite compositional switch towards public consumption. This might be interpreted as a variant of the effect identified by Gramlich (1987): sub-central governments seeking to defend current services rather than spending on infrastructure or raising taxation. This may reflect the greater constraints on sub-central tiers' tax raising powers in many of the OECD countries in our sample, relative to those in the USA. Finally, our results shed some light, at least indirectly, on the 'Fly-paper Effect', by showing that it operates in reverse. Successful consolidations are characterized by cut-backs in grants that are more than offset by cut-backs in sub-central expenditures. In contrast, periods of unsuccessful consolidation are characterized by increases in central taxation, no change in grants, and small, temporary reductions in sub-central expenditure.
In this paper we examine financial interactions between tiers of government. Whilst most existing empirical evidence has focused on the US, it is difficult to generalize conclusions obtained to countries where the position and remit of lower tiers of government is evolving or is less clear constitutionally. Applying event study methodology to a dataset covering 15 countries we examine the timing, extent and composition of fiscal changes around consolidation attempts and central government grant cuts. Highlighting the participation of central and sub-central tiers of government, our analysis also sheds light on key outcomes, including decentralized service provision and macroeconomic adjustment.
The author shows that despite fiscal decentralization and the devolution of considerable authority to the local level during the 1980s, provincial government in China remained dependent on budgetary subsidies from the central government. This was true not only for poor provinces that received central subsidies but also for rich provinces that were net exporters of funds to the centre. (DÜI-Sen)
This paper examines monetary and fiscal interactions in a framework where the government as Stackelberg leader worries about political costs of corruption and central bank opacity acts as a fiscal disciplinary device. Opacity could reduce (increase) inflation expectations, inflation (the output gap) and the responses of these variables to supply shocks, and would improve social welfare. Under the least favourable assumptions on the effect of corruption, i.e. 'sanding‐the‐wheels' or weak 'greasing‐the‐wheels' effect, opacity has a fiscal disciplining effect that could be reinforced by grand corruption. Intransparency increases corruption only if the 'greasing‐the‐wheels' effect is relatively large.
It is widely accepted that local authorities in England have been placed under increasing fiscal pressure during the 1980s by the block grant system combined with the rising level of grant penalties. Controversy surrounds the question of which local authorities have been worst treated by the new system. In this paper it is shown how the measurement of relative fiscal pressure has become much more complex than under the previous grant system, and published results on a suggested measure of fiscal pressure between 1980/81 and 1984/85 are presented.
In England a link has always existed between the central and the local health administrative bodies. This has been helpful in solving problems, standardizing methods, and stimulating local effort through-out the Kingdom.
