Revisiting the Link between Growth and Federalism: A Bayesian Model Averaging Approach
20 Pages Posted: 29 Aug 2013
Date Written: August 28, 2013
Following the ambiguous results in the literature aimed at understanding the empirical link between fiscal federalism and economic growth, this paper revisits the question using a Bayesian Model Averaging approach. The analysis suggests that the failure to appropriately account for model uncertainty may have previously led to biased estimates. The results from a sample of 23 OECD countries over 1975-2000 indicate that after controlling for unobserved country heterogeneity, there is no robust link, neither positive, nor negative, between output growth and fiscal federalism (measured as sub-national governments’ share of own source tax revenue).
Keywords: fiscal federalism, economic growth, Bayesian Model Averaging
JEL Classification: C110, H700, O430
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