The Fiscal Manipulation of a Decentralized Public Sector: Macroeconomic Policy in Denmark

Abstract

The authors challenge the conventional wisdom according to which a decentralized public sector makes it difficult to instrumentalize the public budget for macroeconomic control purposes. Although the literature has already demonstrated that the statistical relationship between decentralization and macroeconomic performance is not as straightforward as is indicated by the conventional wisdom, and that decentralization actually seems to be positively correlated with macroeconomic performance, a gap exists in the literature as to the causal relationship, that is, the exact mechanisms by which decentralization impacts on performance. The authors begin to fill that gap by investigating the workings of one decentralized public budget, namely that of Denmark.