Coordination and Decentralisation of Rules for Fiscal Behaviour in a Federal Structure : The Case of the Swiss Cantons

The coordination of fiscal policies between states or municipalities collides with their individual spending and taxing power. When independently adopted, budget rules can potentially endanger the overall need for macroeconomic stabilisation. Utilising the example of the Swiss cantons, the paper analyses the possibility to bring out a countercyclical policy when sublevels governments introduce compelling rules to balance or almost balance their budget. It is shown that cantons usually adopt a procyclical behaviour. However this behaviour can be thwarted if the central government uses the vertical intergovernmental transfers as an instrument of its stabilisation policy