Economic stimulus measures in the pandemic: the role of fiscal decentralisation

Abstract

Is fiscal federalism associated with economic policy responses and stimulus measures adopted by national and sub-national governments to mitigate the adverse economic effects of the COVID-19 pandemic? In this paper, we provide empirical evidence that it indeed is. Our results indicate that even after controlling for various relevant factors, countries with fiscally federal (decentralised) governments have adopted larger fiscal and macro-financial policy packages (as a percent of GDP). However, there are no significant differences in monetary-policy responses between centralised and decentralised governments. We also show that these results are robust to using different federalism measures, including different sets of control variables and different econometric specifications that include an instrumental variable estimation.