Fiscal decentralization, macrostability and growth

This paper examines how fiscal decentralization may influence economic growth. Previous research on this question has primarily focused on the potential direct relationship between decentralization and growth. In this paper, we also examine the potential indirect influence of decentralization on growth through its impact on macroeconomic stability. We find that decentralization may positively influence price stability in developed countries, though this impact is much less clear in developing and transitional countries. We also find some evidence suggesting that decentralization may directly and negatively affect economic growth in higher-income countries but that this effect is reduced through the indirect positive impact of decentralization on growth through macroeconomic stability.