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FISCAL FEDERALISM AND PUBLIC DEBT FISCAL INSTABILITY DUE TO MULTI LEVEL BORROWING IN A MODEL OF NEOCLASSICAL GROWTH

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Author(s): Holger K√ĄCHELEIN

Journal: Scientific Annals of the Alexandru Ioan Cuza University of Iasi : Economic Sciences Series
ISSN 0379-7864

Volume: 2011;
Issue: LVIII;
Start page: 123;
Date: 2011;
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Keywords: Public debt | fiscal federalism | growth | stability

ABSTRACT
neoclassical growth model with constant saving rates, publicly provided services and public debt is used to analyse the impact of a federal structure. The main focus is on the existence and the stability of steady states. It is shown that the equilibrium in a federation with publicly provided services is more likely to be unstable than the equilibrium with public capital as a substitute. Moreover, only dynamic inefficient solutions are stable. Due to additional instability, the need for flexible vertical assignment of public functions is further stressed.

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