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Fiscal decentralization and capacity to service debt: Are they tightly linked?

Author: YU SHI, REBECCA HENDRICK AND HYUNGGUN PARK
Published in PFM, Vol. 18 No. 2

This research examines the link between fiscal decentralization and government ca-pacity to service debt, while controlling for fiscal, institutional, economic, and ideologi-cal factors that are associated with capacity to service debt held or issued by local governments alone, by state governments alone, and by state and local government combined at the state level. Using panel data from all 50 states in the U.S. from 1962 to 2012, we find a link between fiscal decentralization and capacity to service long-term debt outstanding held by local governments alone and by state and local gov-ernments combined. That is, fiscal decentralization is positively associated with state and local government capacity to service debt outstanding. Nevertheless, we do not find that fiscal decentralization has any relationship with government capacity to ser-vice debt issuance. Statistical results show that capacity to service debt issuance is primarily affected by capital expenditure and alternative capital financing resources such as special assessment.

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