The effect of sub-national borrowing control on fiscal sustainability: how to regulate?

Abstract

This article examines effectiveness of sub-national borrowing control regimes in maintaining overall fiscal sustainability. The results suggest that regulating sub-national borrowing based on fiscal rules performs most efficiently in maintaining fiscal consolidation. Furthermore, sole reliance on financial markets seems to lead to faster end of fiscal consolidation episodes, which may be explained by not fully developed financial markets in many countries that dominantly apply this approach, Finally, strong central government control, as in case of administrative and cooperative regimes, in presence of high fiscal dependence on central government financing seem to increase the probability of ending consolidation episodes.